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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
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1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive, Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue, Jackson, Michigan 49201
(517)788-0550
1-2921 PANHANDLE EASTERN PIPE LINE COMPANY 44-0382470
(A Delaware Corporation)
5444 Westheimer Road, P.O. Box 4967,
Houston, Texas 77210-4967
(713)989-7000
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Panhandle Eastern Pipe Line Company meets the conditions set forth in General
Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q
with the reduced disclosure format. In accordance with Instruction H, Part I,
Item 2 has been reduced and Part II, Items 2, 3 and 4 have been omitted.
Number of shares outstanding of each of the issuer's classes of common stock at
October 31, 1999:
CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 115,800,521
CMS Energy Class G Common Stock, no par value 0
CONSUMERS ENERGY COMPANY, $10 par value, privately held by CMS Energy 84,108,789
PANHANDLE EASTERN PIPE LINE COMPANY, no par value,
indirectly privately held by CMS Energy 1,000
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CMS ENERGY CORPORATION
AND
CONSUMERS ENERGY COMPANY
AND
PANHANDLE EASTERN PIPE LINE COMPANY
QUARTERLY REPORTS ON FORM 10-Q TO THE SECURITIES AND
EXCHANGE COMMISSION FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
This combined Form 10-Q is separately filed by each of CMS Energy Corporation,
Consumers Energy Company and Panhandle Eastern Pipe Line Company. Information
contained herein relating to each individual registrant is filed by such
registrant on its own behalf. Accordingly, except for their respective
subsidiaries, Consumers Energy Company and Panhandle Eastern Pipe Line Company
make no representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
Glossary........................................................................ 3
PART I:
CMS Energy Corporation
Management's Discussion and Analysis....................................... CMS-1
Consolidated Statements of Income.......................................... CMS-18
Consolidated Statements of Cash Flows...................................... CMS-20
Consolidated Balance Sheets................................................ CMS-22
Consolidated Statements of Common Stockholders' Equity..................... CMS-24
Condensed Notes to Consolidated Financial Statements....................... CMS-25
Report of Independent Public Accountants................................... CMS-45
Consumers Energy Company
Management's Discussion and Analysis....................................... CE-1
Consolidated Statements of Income.......................................... CE-13
Consolidated Statements of Cash Flows...................................... CE-14
Consolidated Balance Sheets................................................ CE-16
Consolidated Statements of Common Stockholder's Equity..................... CE-18
Condensed Notes to Consolidated Financial Statements....................... CE-19
Report of Independent Public Accountants................................... CE-31
Panhandle Eastern Pipe Line Company
Management's Discussion and Analysis....................................... PE-1
Consolidated Statements of Income.......................................... PE-7
Consolidated Statements of Cash Flows...................................... PE-9
Consolidated Balance Sheets................................................ PE-10
Consolidated Statements of Common Stockholder's Equity..................... PE-12
Condensed Notes to Consolidated Financial Statements....................... PE-13
Report of Independent Public Accountants................................... PE-20
Quantitative and Qualitative Disclosures about Market Risk...................... CO-1
PART II:
Item 1. Legal Proceedings.................................................. CO-1
Item 2. Changes in Securities and Use of Proceeds.......................... CO-2
Item 6. Exhibits and Reports on Form 8-K................................... CO-2
Signatures...................................................................... CO-3
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GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE......................................Association of Businesses Advocating Tariff Equity
ALJ........................................Administrative Law Judge
Anadarko.................................. Anadarko Petroleum Corporation, a non-affiliated company
Articles.................................. Articles of Incorporation
Attorney General.......................... Michigan Attorney General
Aux Sable................................. Aux Sable Liquids Products, L.P., a non-affiliated company
bcf....................................... Billion cubic feet
Big Rock.................................. Big Rock Point nuclear power plant, owned by Consumers
Board of Directors........................ Board of Directors of CMS Energy
Btu....................................... British thermal unit
Class G Common Stock.......................One of two classes of common stock of CMS Energy, no par value, which reflects
the separate performance of the Consumers Gas Group
Clean Air Act............................. Federal Clean Air Act, as amended
CMS Energy................................ CMS Energy Corporation, the parent of Consumers and Enterprises
CMS Energy Common Stock................... One of two classes of common stock of CMS Energy, par value $.01 per share
CMS Gas Transmission...................... CMS Gas Transmission and Storage Company, a subsidiary of Enterprises
CMS Generation............................ CMS Generation Co., a subsidiary of Enterprises
CMS Holdings.............................. CMS Midland Holdings Company, a subsidiary of Consumers
CMS Midland............................... CMS Midland Inc., a subsidiary of Consumers
CMS MST................................... CMS Marketing, Services and Trading Company, a subsidiary of Enterprises
CMS Oil and Gas .......................... CMS Oil and Gas Company, a subsidiary of Enterprises
CMS Panhandle Holding .................... CMS Panhandle Holding Company, a subsidiary of CMS Gas Transmission
Common Stock.............................. CMS Energy Common Stock and Class G Common Stock
Consumers................................. Consumers Energy Company, a subsidiary of CMS Energy
Consumers Gas Group....................... The gas distribution, storage and transportation businesses currently
conducted by Consumers and Michigan Gas Storage
Court of Appeals.......................... Michigan Court of Appeals
Detroit Edison.............................The Detroit Edison Company, a non-affiliated company
Dow....................................... The Dow Chemical Company, a non-affiliated company
Duke Energy............................... Duke Energy Corporation, a non-affiliated company
EITF...................................... Emerging Issues Task Force
Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy
EPA....................................... Environmental Protection Agency
EPS....................................... Earning per share
Exchange Notes............................ $300 million 6.125% senior notes due 2004, $200 million 6.5% senior notes due
2009 and $300 million 7% senior notes
due 2029 issued by Panhandle Eastern
Pipeline Company for outstanding
notes issued by CMS Panhandle Holding
Company
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FASB...................................... Financial Accounting Standards Board
FERC...................................... Federal Energy Regulatory Commission
FMLP...................................... First Midland Limited Partnership, a partnership which operates a marketing
center for natural gas
GCR........................................Gas cost recovery
GTNs...................................... CMS Energy General Term Notes(R), $250 million Series A, $125 million Series B,
$150 million Series C, $200 million Series D and $400 million Series E
IT.........................................Information technology
Jorf Lasfar................................The 1,356 MW (660 MW in operation and 696 MW under construction) coal-fueled
power plant in Morocco, jointly owned by CMS Generation and ABB Energy
Venture, Inc.
kWh........................................Kilowatt-hour
Loy Yang...................................The 2,000 MW brown coal fueled Loy Yang A power plant and an associated coal
mine in Victoria, Australia, in which CMS Generation holds a 50 percent
ownership interest
mcf........................................Thousand cubic feet
MCV Facility.............................. A natural gas-fueled, combined-cycle cogeneration facility operated by the MCV
Partnership
MCV Partnership........................... Midland Cogeneration Venture Limited Partnership in which Consumers has a 49
percent interest through CMS Midland
MD&A...................................... Management's Discussion and Analysis
Mdth/d.................................... Million dekatherms per day
MichCon................................... Michigan Consolidated Gas Company, a non-affiliated company
Michigan Gas Storage...................... Michigan Gas Storage Company, a subsidiary of Consumers
MMBtu..................................... Million British thermal unit
MPSC...................................... Michigan Public Service Commission
MW........................................ Megawatts
NEIL.......................................Nuclear Electric Insurance Limited, an industry mutual insurance company owned
by member utility companies
NOI....................................... Notice of inquiry
NOPR...................................... Notice of proposed rulemaking
Northern Border........................... Northern Border Pipeline Company
NRC....................................... Nuclear Regulatory Commission
Order 888 and Order 889....................FERC final rules issued on April 24, 1996
Outstanding Shares........................ Outstanding shares of Class G Common Stock
Palisades..................................Palisades nuclear power plant, owned by Consumers
Pan Gas Storage........................... Pan Gas Storage Company, a subsidiary of Panhandle Eastern Pipe Line Company
Panhandle................................. Panhandle Eastern Pipe Line Company, including its subsidiaries Trunkline, Pan
Gas Storage, Panhandle Storage, and Trunkline
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LNG. Panhandle is a wholly owned subsidiary of CMS Gas Transmission
Panhandle Storage......................... CMS Panhandle Storage Company, a subsidiary of Panhandle Eastern Pipe Line
Company
PCBs...................................... Poly chlorinated biphenyls
PECO...................................... PECO Energy Company, a non-affiliated company
PPA........................................The Power Purchase Agreement between Consumers and the MCV Partnership with a
35-year term commencing in March 1990
PSCR.......................................Power supply cost recovery
SEC........................................Securities and Exchange Commission
Senior Credit Facilities.................. $725 million senior credit facilities consisting of a $600 million three-year
revolving credit facility and a five-year $125 million term loan facility
SFAS...................................... Statement of Financial Accounting Standards
SOP....................................... Statement of position
Superfund................................. Comprehensive Environmental Response, Compensation and Liability Act
Transition Costs...........................Costs incurred by utilities in order to serve their customers in a regulated
monopoly environment, but which may not be recoverable in a competitive
environment because of customers leaving their systems and ceasing to pay for
their costs. These costs could include owned and purchased generation,
regulatory assets, and costs incurred in the transition to competition.
Trunkline................................. Trunkline Gas Company, a subsidiary of Panhandle Eastern Pipe Line Company
Trunkline LNG..............................Trunkline LNG Company, a subsidiary of Panhandle Eastern Pipe Line Company
Trust Preferred Securities.................Securities representing an undivided beneficial interest in the assets of
statutory business trusts, which interests have a preference with respect to certain
trust distributions over the interests of either CMS Energy or Consumers, as applicable,
as owner of the common beneficial interests of the trusts
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CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
CMS Energy is the parent holding company of Consumers and Enterprises. Consumers
is a combination electric and gas utility company serving the Lower Peninsula of
Michigan. Consumers is a subsidiary of CMS Energy. Enterprises, through
subsidiaries, is engaged in several domestic and international energy-related
businesses including: natural gas transmission, storage and processing;
independent power production; oil and gas exploration and production; energy
marketing, services and trading; and international energy distribution. On
March 29, 1999, CMS Energy completed the acquisition of Panhandle, as further
discussed in the Capital Resources and Liquidity section of this MD&A and
Note 1. Panhandle is primarily engaged in the interstate transportation and
storage of natural gas.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
CMS Energy's 1998 Form 10-K. This MD&A also refers to, and in some sections
specifically incorporates by reference, CMS Energy's Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Statements and Notes. This report contains forward-looking statements, as
defined by the Private Securities Litigation Reform Act of 1995. While
forward-looking statements are based on assumptions and such assumptions are
believed to be reasonable and are made in good faith, CMS Energy cautions that
assumed results almost always vary from actual results and differences between
assumed and actual results can be material. The type of assumptions that could
materially affect the actual results are discussed in the Forward-Looking
Statements section in this MD&A. More specific risk factors are contained in
various public filings made by CMS Energy with the SEC. This report also
describes material contingencies in the Notes to Consolidated Financial
Statements and the readers are encouraged to read such Notes.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED EARNINGS
Millions, Except Per Share Amounts
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September 30 1999 1998 Change
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THREE MONTHS ENDED
Consolidated Net Income $ 83 $ 81 $ 2
Net Income Attributable to Common Stocks:
CMS Energy 86 83 3
Class G (3) (2)
(1)
Earnings Per Average Common Share:
CMS Energy
Basic .79 .81 (.02)
Diluted .78 .80 (.02)
Class G
Basic and Diluted (.38) (.16) (.22)
NINE MONTHS ENDED (a)
Consolidated Net Income $ 256 $ 234 $ 22
Net Income Attributable to Common Stocks:
CMS Energy 248 226 22
Class G 8 8 -
Earnings Per Average Common Share:
CMS Energy
CMS- 1
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Basic 2.29 2.23 .06
Diluted 2.25 2.19 .06
Class G
Basic and Diluted .90 1.04 (.14)
TWELVE MONTHS ENDED (a)
Consolidated Net Income $ 307 $ 293 $ 14
Net Income Attributable to Common Stocks:
CMS Energy 294 279 15
Class G 13 14 (1)
Earnings Per Average Common Share:
CMS Energy
Basic 2.73 2.77 (.04)
Diluted 2.70 2.73 (.03)
Class G
Basic and Diluted 1.41 1.73 (.32)
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(a) Includes the cumulative effect of an accounting change for property taxes
which increased net income by $43 million or $.40 per share - basic and diluted
- - for CMS Energy Common Stock and $12 million or $.36 per share basic and
diluted - for Class G Common Stock.
The increase in consolidated net income for the third quarter of 1999 over the
comparable period in 1998 resulted from increased earnings from the electric
utility; the natural gas transmission, storage and processing business as a
result of the Panhandle acquisition; and the oil and gas exploration and
production business; and lower losses from the international energy distribution
business. Partially offsetting these increases were lower earnings from the gas
utility, independent power production, marketing services and trading
businesses, and higher interest expense.
The increase in consolidated net income for the nine months ended September 30,
1999 over the comparable period in 1998 resulted from increased earnings in the
electric and gas utilities and natural gas transmission, storage and processing
business as a result of the Panhandle acquisition; lower losses from the
international energy distribution business; and the recognition in 1998 of a $37
million loss ($24 million after-tax) for the underrecovery of power costs under
the PPA. Partially offsetting these increases were lower earnings from the
independent power production business, the 1998 cumulative effect of the
accounting change for property taxes and higher interest expense in the current
period.
The increase in consolidated net income for the twelve months ended September
30, 1999 over the comparable 1998 period reflects increased earnings from the
electric utility; natural gas transmission, storage and processing as a result
of the Panhandle acquisition; and marketing, services and trading businesses.
Partially offsetting these increases were lower earnings from the independent
power production and oil and gas exploration and production businesses coupled
with higher interest expense.
For further information, see the individual results of operations for each CMS
Energy business segment in this MD&A.
CMS-2
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CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
In Millions
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Three Months Nine Months Twelve Months
Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
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Electric deliveries $ 6 $ 32 $ 25
Power supply costs and related revenue recovery 6 24 41
Other non-commodity revenue (5) (10) (11)
Operations and maintenance 9 6 3
General taxes and depreciation (1) (5) (4)
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Total change $ 15 $ 47 $ 54
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ELECTRIC DELIVERIES: Total electric deliveries for the three months, nine months
and twelve months ended September 30, 1999, increased in all customer classes
due primarily to sales growth. Electric deliveries were 10.9 billion kWh for the
three months ended September 30, 1999, an increase of 1.7 percent. Electric
deliveries were 31.3 billion kWh for the nine months ended September 30, 1999,
an increase of 3.8 percent. Electric deliveries were 41.2 billion kWh for the
twelve months ended September 30, 1999, an increase of 2.5 percent.
POWER COSTS:
In Millions
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September 30 1999 1998 Change
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Three months ended $ 335 $ 315 $ 20
Nine months ended 906 899 7
Twelve months ended 1,182 1,190 (8)
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Power costs increased for the three and nine month periods ended September 30,
1999 compared to the same 1998 period as a result of higher sales. Power costs
decreased for the twelve month period ended September 30, 1999 compared to the
same 1998 period due to lower purchased power costs which more than offset the
increased power cost as a result of higher sales.
UNCERTAINTIES: Several trends or uncertainties may affect CMS Energy's financial
condition. These trends or uncertainties have, or CMS Energy reasonably expects
could have, a material impact on net sales, revenues, or income from continuing
electric operations. Such uncertainties include: 1) capital expenditures for
compliance with the Clean Air Act; 2) environmental liabilities arising from
compliance with various federal, state and local environmental laws and
regulations, including potential liability or expenses relating to the Michigan
Natural Resources and Environmental Protection Act and Superfund; 3) cost
recovery relating to the MCV Partnership; 4) electric industry restructuring; 5)
implementation of a frozen PSCR and initiatives to be undertaken to reduce
exposure to high energy prices; 6) nuclear decommissioning issues and ongoing
issues relating to the storage of spent fuel and the operating life of
Palisades. For detailed information about these trends or uncertainties, see
Note 2, Uncertainties, incorporated by reference herein.
CMS-3
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CONSUMERS GAS GROUP RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
In Millions
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Three Months Nine Months Twelve Months
Ended Sept. 30 Ended Sept.30 Ended Sept. 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
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Gas deliveries $ 1 $ 21 $ 8
Gas commodity and related revenue (11) - 10
Gas wholesale and retail services activities - 2 3
Operation and maintenance (4) (8) (1)
General taxes, depreciation and other 2 (9) (22)
--------------------------------------------------
Total increase (decrease) in pretax operating income $ (12) $ 6 $ (2)
====================================================================================================================
GAS DELIVERIES: System deliveries for the three month period ended September 30,
1999, including miscellaneous transportation, were 43.6 bcf compared to 42 bcf
for the same 1998 period. This increase of 3.8 percent was primarily due to
weather during the period. System deliveries for the nine months period ended
September 30, 1999, including miscellaneous transportation, were 272.3 bcf
compared to 249.8 bcf for the same 1998 period. This increase of 9.0 percent was
primarily due to colder temperatures during the 1999 heating season. System
deliveries for the twelve month period ended September 30, 1999, including
miscellaneous transportation, were 382.3 bcf compared to 376.7 bcf for the same
1998 period. This increase of 1.5 percent was again primarily the result of
colder temperatures during the 1999 heating season.
COST OF GAS SOLD:
In Millions
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September 30 1999 1998 Change
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Three months ended $ 44 $ 39 $ 5
Nine months ended 428 377 51
Twelve months ended 614 600 14
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The cost increases for the three month period ended September 30, 1999 resulted
from higher gas cost during this period. The cost increases for the nine month
period and the twelve month period ended September 30, 1999 was the result of
increased sales due to colder overall temperatures during the winter heating
season partially offset by lower gas prices.
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, or CMS Energy reasonably expects could have,
a material impact on net sales or revenues or income from continuing gas
operations. Such uncertainties include: 1) potential environmental costs at a
number of sites, including sites formerly housing manufactured gas plant
facilities; 2) a statewide experimental gas restructuring program; and 3)
implementation of a suspended GCR and initiatives undertaken to protect against
gas price increases. For detailed information about these uncertainties see Note
2, Uncertainties, incorporated by reference herein.
CMS-4
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INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 1999 decreased $6 million (11 percent) from the comparable period
in 1998. This decrease primarily reflects the 1998 gains on the sales of a
biomass power purchase agreement and two biomass plants, partially offset by
increased operating income from international and domestic plant earnings and
fees. Pretax operating income for the nine months ended September 30, 1999
decreased $3 million (2 percent) from the comparable period in 1998. This
decrease primarily reflects 1998 gains on the sale of two power purchase
agreements and two biomass plants, the scheduled reduction of the industry
expertise service fee income earned in connection with the purchase of Loy Yang,
and the settlement of a lawsuit, partially offset by increased operating income
from international and domestic plant earnings and fees, a gain on the sale of
two hydro plants in 1999, and increased earnings from the MCV Partnership.
Pretax operating income for the twelve months ended September 30, 1999 decreased
$11 million (7 percent) from the comparable period in 1998, primarily reflecting
the 1998 gains on the sale of plant assets and power purchase agreements, higher
operating expenses, the settlement of a lawsuit and the scheduled reduction of
the industry expertise service fee income earned in connection with the purchase
of Loy Yang, partially offset by increased international and domestic earnings.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 1999 increased $3 million (150 percent) from the comparable period
in 1998 as a result of higher realized commodity prices and lower exploration
expenses, partially offset by lower oil and gas production and higher operating
expenses. Pretax operating income for the nine months ended September 30, 1999
increased $1 million (8 percent) from the comparable period in 1998 due to
higher oil prices and lower exploration expenses, partially offset by lower
natural gas production, lower gas and natural gas liquid prices, and increased
operating expenses. Pretax operating income for the twelve months ended
September 30, 1999 decreased $15 million (68 percent) from the comparable period
in 1998 as a result of lower oil and gas prices, a gain in the prior period from
the sale of CMS Oil and Gas' entire interest in oil and gas properties in Yemen
and higher operating expenses, partially offset by an increase in oil
production.
NATURAL GAS TRANSMISSION, STORAGE AND PROCESSING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 1999 increased $45 million (750 percent) from the comparable
period in 1998. The increase reflects earnings from Panhandle, which was
acquired in March 1999, and from other recently acquired international and
domestic operations. Pretax operating income for the nine months ended September
30, 1999 increased $74 million (264 percent) from the comparable period in 1998
primarily due to earnings from Panhandle and an Australian pipeline acquired in
December 1998, partially offset by gains in the prior period on the sale of
Petal Gas Storage Company and Australian gas reserves, and increased net
operating expenses primarily relating to the Panhandle acquisition. Pretax
operating income for the twelve months ended September 30, 1999 increased $74
million (224 percent) from the comparable period in 1998. The increase primarily
reflects earnings from Panhandle and an Australian pipeline acquired in December
1998, partially offset by a gain in the prior period on the sale of Petal Gas
Storage Company and Australian gas reserves.
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, or CMS Energy reasonably expects could have,
a material impact on net sales or revenues or income from continuing gas
operations. For detailed information about Panhandle's regulatory uncertainties
see Note 2, Uncertainties - Panhandle Regulatory Matters, incorporated by
reference herein.
CMS-5
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MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 1999 decreased $2 million from the comparable period in 1998. The
decrease results from increased gas price volatility and higher third quarter
1998 wholesale power sales, partially offset by additional gas sales. Pretax
operating income for the nine months ended September 30, 1999 decreased $1
million from the comparable period in 1998. The decrease results from higher gas
price volatility, partially offset by higher gas sales. Pretax operating income
for the twelve months ended September 30, 1999 increased $7 million from the
comparable period in 1998. The increase is a result of favorable gas margins and
additional gas sales. Gas managed and marketed for end users totaled 284 bcf and
223 bcf for the nine months ended September 30, 1999 and 1998, respectively.
MARKET RISK INFORMATION
CMS Energy is exposed to market risks including, but not limited to, changes in
interest rates, currency exchange rates, and certain commodity and equity
prices. Management employs established policies and procedures to manage its
risks associated with these market fluctuations including the use of various
derivative instruments such as futures, swaps, options and forward contracts.
Management believes that any losses incurred on derivative instruments used to
hedge risk would be offset by an opposite movement of the value of the hedged
item.
In accordance with SEC disclosure requirements, CMS Energy has performed
sensitivity analyses to assess the potential loss in fair value, cash flows and
earnings based upon hypothetical 10 percent increases and decreases in market
exposures. Management does not believe that sensitivity analyses alone provide
an accurate or reliable method for monitoring and controlling risks. Therefore,
CMS Energy and its subsidiaries rely on the experience and judgment of senior
management and traders to revise strategies and adjust positions as they deem
necessary. Losses in excess of the amounts determined in the sensitivity
analyses could occur if market rates or prices exceed the 10 percent shift used
for the analyses.
COMMODITY PRICE RISK: Management uses commodity futures contracts, options and
swaps (which require a net cash payment for the difference between a fixed and
variable price) to manage commodity price risk. The prices of energy commodities
fluctuate due to changes in the supply of and demand for those commodities. To
reduce price risk caused by these market fluctuations, CMS Energy hedges certain
inventory and purchases and sales contracts. A hypothetical 10 percent adverse
shift in quoted commodity prices in the near term would not have had a material
impact on CMS Energy's consolidated financial position, results of operations or
cash flows as of September 30, 1999. The analysis assumes that the maximum
exposure associated with purchased options is limited to premiums paid. The
analysis also does not quantify short-term exposure to hypothetically adverse
price fluctuations in inventories.
INTEREST RATE RISK: Management uses a combination of fixed-rate and
variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital. The carrying amount of long-term debt was $6.3 billion at
September 30, 1999 with a fair value of $6.1 billion. The fair value of CMS
Energy's interest rate swaps at September 30, 1999, with a notional amount of
$3.1 billion, was $2 million, representing the amount CMS Energy would receive
upon settlement. A hypothetical 10 percent adverse shift in interest rates in
the near term would not have a material effect on CMS Energy's consolidated
financial position, results of operations or cash flows as of September 30,
1999.
CMS-6
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CURRENCY EXCHANGE RISK: Management uses forward exchange and option contracts to
hedge certain net investments in foreign operations. A hypothetical 10 percent
adverse shift in currency exchange rates would not have a material effect on CMS
Energy's consolidated financial position or results of operations as of
September 30, 1999, but would result in a net cash settlement of approximately
$47 million. The estimated fair value of the foreign exchange and option
contracts at September 30, 1999 was $24 million, representing the amount CMS
Energy would pay upon settlement.
EQUITY SECURITY PRICE RISK: CMS Energy and certain of its subsidiaries have
equity investments in companies in which they hold less than a 20 percent
interest. A hypothetical 10 percent adverse shift in equity security prices
would not have a material effect on CMS Energy's consolidated financial
position, results of operations or cash flows as of September 30, 1999.
For a discussion of accounting policies related to derivative transactions, see
Note 5.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of cash is dividends and distributions
from subsidiaries. During the nine months ended September 30, 1999, Consumers
paid $207 million in common dividends and Enterprises paid $55 million in
common dividends to CMS Energy. In September 1999, Consumers declared a
$55 million dividend payable in November 1999 to CMS Energy. In June 1999, CMS
Energy contributed $150 million of paid-in capital to Consumers. CMS Energy's
consolidated cash requirements are met by its operating and financing
activities.
OPERATING ACTIVITIES: CMS Energy's consolidated net cash provided by operating
activities is derived mainly from the processing, storage, transportation and
sale of natural gas; the generation, transmission, distribution and sale of
electricity; and the sale of oil. Consolidated cash from operations totaled $440
million and $386 million for the first nine months of 1999 and 1998,
respectively. The $54 million increase resulted from increased cash earnings,
partially offset by an increase in undistributed equity earnings of
unconsolidated subsidiaries. CMS Energy uses cash derived from operating
activities primarily to expand its international and domestic businesses, to
maintain and expand electric and gas systems of Consumers, to pay interest on
and retire portions of its long-term debt, and to pay dividends.
INVESTING ACTIVITIES: CMS Energy's consolidated net cash used in investing
activities totaled $2.7 billion and $690 million for the first nine months of
1999 and 1998, respectively. The increase of $2.0 billion primarily reflects the
acquisition of Panhandle in March 1999. CMS Energy's expenditures during the
first nine months of 1999 for its utility and international businesses were $304
million and $2.4 billion, respectively, compared to $290 million and $424
million, respectively, during the comparable period in 1998.
FINANCING ACTIVITIES: CMS Energy's net cash provided by financing activities
totaled $2.4 billion and $336 million for the first nine months of 1999 and
1998, respectively. The increase of $2.1 billion in net cash provided by
financing activities resulted from an increase of $1.716 billion in the issuance
of new securities (see table below) and a decrease in the retirement of bonds
and other long-term debt ($574 million), partially offset by an increase in the
retirement of existing securities ($194 million).
CMS-7
13
In Millions
- --------------------------------------------------------------------------------------------------------------------------------
Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
- ---------------------------------------------------------------------------------------------------------------------------------
CMS ENERGY
GTNs Series E (1) (1) 7.2%(1) $ 181 General corporate purposes
Senior Notes January 2009 7.5% $ 480 Repay debt and general
corporate purposes
Senior Notes February 2004 6.75% $ 300 Repay debt and general
corporate purposes
Trust Preferred Securities June 2001 (2) $ 250 To refinance acquisition
of Panhandle
Senior Notes June 2011 8.0%(4) $ 250 To refinance acquisition of
Panhandle
Senior Notes June 2013 8.375%(5) $ 150 To refinance acquisition of
Panhandle
Adjustable Convertible Trust
Preferred Securities July 2004 8.75% $ 300 Repay debt and general
corporate purposes
----------
Subtotal $1,911
PANHANDLE
Senior Notes (3) March 2004 6.125% $ 300 To fund acquisition of
Panhandle
Senior Notes (3) March 2009 6.5% $ 200 To fund acquisition of
Panhandle
Senior Notes (3) March 2029 7.0% $ 300 To fund acquisition of
Panhandle
` ----------
Subtotal $ 800
----------
Total $2,711
=================================================================================================================================
(1) GTNs are issued from time to time with varying maturity dates. The rate
shown herein is a weighted average interest rate.
(2) The Trust Preferred Securities pay quarterly distributions at a floating
rate of LIBOR plus 1.75 percent. For detailed information, see Note 3,
incorporated by reference herein.
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(3) These notes were privately placed by CMS Panhandle Holding on March 29,
1999, with an irrevocable and unconditional guarantee by Panhandle. On June
15, 1999, CMS Panhandle Holding merged into Panhandle, at which point the
notes became direct obligations of Panhandle. In September 1999, Panhandle
exchanged the $800 million of notes originally issued by CMS Panhandle
Holding with substantially identical SEC-registered notes.
(4) The interest rate may be reset in July 2001. For detailed information, see
Note 3, incorporated by reference herein.
(5) The interest rate may be reset in July 2003. For detailed information, see
Note 3, incorporated by reference herein.
During the nine months ended September 30, 1999, CMS Energy declared and paid
$153 million in cash dividends to holders of CMS Energy Common Stock and $9
million in cash dividends to holders of Class G Common Stock. In September 1999,
the Board of Directors declared a quarterly dividend of $.365 per share on CMS
Energy Common Stock, payable in November 1999.
OTHER INVESTING AND FINANCING MATTERS: At September 30, 1999, the book value per
share of CMS Energy Common Stock and Class G Common Stock was $20.49 and $12.28,
respectively.
At September 30, 1999, CMS Energy had an aggregate $1.7 billion in securities
registered for future issuance, which may include the issuance of CMS Energy
Common Stock during the next twelve months.
CMS Energy has Senior Credit Facilities, unsecured lines of credit and letters
of credit as anticipated sources of funds to finance working capital
requirements and to pay for capital expenditures between long-term financings.
At September 30, 1999, the total amount available under the Senior Credit
Facilities was $8 million, and under the unsecured lines of credit and letters
of credit was $163 million. For detailed information, see Note 3, incorporated
by reference herein.
Consumers has credit facilities, lines of credit and a trade receivable sale
program in place as anticipated sources of funds to fulfill its currently
expected capital expenditures. For detailed information about these sources of
funds, see Note 3, incorporated by reference herein.
In March 1999, CMS Energy acquired Panhandle from Duke Energy for a cash payment
of $1.9 billion and existing Panhandle debt of $300 million. The acquisition of
Panhandle initially was financed with a $600 million bridge loan negotiated with
domestic banks, proceeds from CMS Energy long-term debt, and approximately $800
million of notes privately placed by CMS Panhandle Holding. As of June 30, 1999,
the entire bridge loan had been repaid from proceeds of the sale of $250 million
of Trust Preferred Securities and $400 million of senior notes discussed below.
In April 1999, Consumers redeemed all eight million outstanding shares of its
$2.08 preferred stock at $25.00 per share for a total of $200 million.
In July 1999, 7.25 million units of 8.75 percent Adjustable Convertible Trust
Securities were sold by CMS Energy and CMS Energy Trust II, a Delaware statutory
business trust established by CMS Energy. Each security consists of a Trust
Preferred Security of CMS Energy Trust II maturing in five years and a contract
for the purchase of CMS Energy Common Stock in three years at a conversion
premium up to 28 percent or an effective price of $53 per common share. Net
proceeds from the sale totaled $291 million and were used to repay portions of
various lines of credit and the revolving credit facility.
On October 25, 1999, CMS Energy exchanged approximately 6.1 million shares of
CMS Energy Common Stock for all of the approximately 8.7 million issued and
outstanding shares of Class G Common Stock in
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a tax-free exchange for United States federal income tax purposes. For detailed
information, see Note 7, incorporated by reference herein.
On November 10, 1999, CMS Energy privately placed 125,000 shares of its
Mandatorily Convertible Preferred Stock with CMS Share Trust, a Delaware
statutory business trust established by CMS Energy, in connection with a $125
million secured debt issuance by an unconsolidated subsidiary. The Mandatorily
Convertible Preferred Stock has a liquidation preference of $1,000 per share and
does not pay dividends while held by the CMS Share Trust. Under certain
circumstances involving the unconsolidated subsidiary's and CMS Energy's
inability to pay principal and/or interest on the subsidiary's debt, the
Mandatorily Convertible Preferred Stock may be remarketed to third parties with
the proceeds applied to payment of the subsidiary's debt. At the time of
remarketing, if any, a market-based dividend rate and the terms of the
conversion into CMS Energy Common Stock would be established.
On October 18, 1999, CMS Energy announced that because of the low market price
of CMS Energy Common Stock at that time, it identified an alternative way to
improve its balance sheet through the sale of non-strategic assets. CMS Energy
has identified for possible sale $1 billion of assets which are expected to
contribute little or no earnings benefit in the short to medium term. CMS Energy
plans to sell $500 to $700 million of such assets by the end of the first
quarter of 2000. While there are no assurances that agreements to sell such
assets, or to sell that amount of assets, will be achieved, the cash raised in
this manner is expected to make further issuance of equity securities
unnecessary in the near future.
CAPITAL EXPENDITURES
CMS Energy estimates that capital expenditures, including new lease commitments
and investments in partnerships and unconsolidated subsidiaries, will total $7.1
billion during 1999 through 2001. These estimates are prepared for planning
purposes and are subject to revision. This total includes approximately $2.2
billion for the acquisition of Panhandle as described above. A substantial
portion of the remaining capital expenditures is expected to be satisfied by
cash from operations. CMS Energy will continue to evaluate capital markets in
1999 as a potential source of financing its subsidiaries' investing activities.
CMS Energy estimates capital expenditures by business segment over the next
three years as follows:
In Millions
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1999 2000 2001
- -------------------------------------------------------------------------------------------------------------------
Consumers electric operations (a) $ 400 $ 435 $ 520
Consumers gas operations (a) 125 130 130
Independent power production 520 591 293
Oil and gas exploration and production 155 160 210
Natural gas transmission and storage 2,525(b) 247 200
International energy distribution 115 150 150
Marketing, services and trading 45 12 12
Other 10 - -
--------------------------------------------
$3,895 $1,725 $1,515
===================================================================================================================
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and gas
utility businesses.
(b) This amount includes approximately $2.2 billion for the acquisition of
Panhandle.
CMS Energy currently plans investments from 1999 to 2001: i) in oil and gas
exploration and production operations, primarily in North and South America,
offshore West Africa and North Africa; ii) in
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acquisitions and development of electric generating plants in the United States,
Latin America, North Africa, the Middle East, and select areas of Asia,
including India; iii) to continue development of nonutility natural gas storage,
gathering and pipeline operations of CMS Gas Transmission in North and South
America, Australia and Africa; iv) to acquire, develop and expand international
energy distribution businesses; and v) to provide gas, electric, oil and coal
marketing, risk management and energy management services throughout the United
States and eventually worldwide.
OUTLOOK
As the deregulation and privatization of the energy industry takes place in the
United States and in foreign countries, CMS Energy has positioned itself to be a
leading international diversified energy company acquiring, developing and
operating energy facilities and providing energy services in major world growth
markets. CMS Energy provides a complete range of international energy expertise
from energy production to consumption.
INTERNATIONAL OPERATIONS OUTLOOK
CMS Energy will continue to grow internationally by investing in multiple
projects in several countries as well as by developing synergistic projects
across its lines of business. CMS Energy believes these integrated projects will
create more opportunities and greater value than individual investments. Also,
CMS Energy will achieve this growth through strategic partnering where
appropriate.
CMS Energy seeks to minimize operational and financial risks when operating
internationally by working with local partners, utilizing multilateral financing
institutions, procuring political risk insurance and hedging foreign currency
exposure where appropriate.
CONSUMERS' ELECTRIC UTILITY OUTLOOK
GROWTH: Consumers expects average annual growth of 2.6 percent per year in
electric system deliveries for the years 2000 to 2004. This growth rate does not
take into account the possible impact of restructuring or changed regulation on
the industry. Abnormal weather, changing economic conditions, or the developing
competitive market for electricity may affect actual electric sales by Consumers
in future periods.
RESTRUCTURING: Competition affects Consumers' retail electric business. To meet
its challenges, Consumers has multi-year contracts with some of its largest
industrial customers to serve certain facilities. The MPSC approved these
contracts as part of its phased introduction to competition. Some of these
contracts have termination and restructuring options available to customers
depending on business and regulatory circumstances that may occur in the future.
FERC Orders 888 and 889, as amended, require utilities to provide direct access
to the interstate transmission grid for wholesale transactions. Consumers and
Detroit Edison disagree on the effect of the orders on the Michigan Electric
Power Coordination Center pool. Consumers proposes to maintain the benefits of
the pool through at least December 2000. Detroit Edison, however, had previously
proposed that the parties terminate the pool agreement immediately. If the pool
agreement is terminated, Consumers could, among other alternatives, join a
regional transmission organization. FERC has indicated this preference for
structuring the operations of the electric transmission grid.
For material changes relating to the restructuring of the electric utility
industry, see Note 1, Corporate
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Structure and Basis of Presentation, "Utility Regulation" and Note 2,
Uncertainties, "Consumers' Electric Utility Rate Matters - Electric
Restructuring", incorporated by reference herein.
RATE MATTERS: In November 1997, ABATE filed a complaint with the MPSC alleging
that Consumers' electric earnings are more than its authorized rate of return
and sought an immediate reduction in Consumers' electric rates. The MPSC staff
investigated the complaint and concluded in an April 1998 report that no formal
rate proceeding was warranted at that time. The MPSC has now scheduled this
matter for further proceedings that should lead to more definitive MPSC
resolution in the first quarter of 2000, absent prior agreement among the
parties. In those proceedings, ABATE and intervenors bear the burden of
convincing the MPSC to reduce electric rates, which will otherwise remain
unchanged. In its testimony filed in this case, ABATE claimed that Consumers'
received approximately $189 million in excess revenues for 1998. In its
testimony MPSC staff stated that 1998 financial results show excess revenues of
$118 million when actual results were compared to the previously authorized
electric return on equity, but recognized that no definitive conclusion could be
reached from such a simplistic computation about the proper level of future
retail electric rates. The MPSC staff presentation anticipated Consumers would
file testimony and exhibits using traditional ratemaking adjustments and
normalizations which would negate ABATE's claim of excessive earnings. Consumers
has filed such testimony showing that after such normalizations, there is a
revenue deficiency of approximately $3 million. The MPSC staff offered several
alternatives for the MPSC to consider. They involved several different refunds
or reductions which the MPSC could consider separately or in combination, but
which, if made would not result in a permanent future reduction in electric
rates in the amount being sought by ABATE. Consumers believes that ABATE has not
met its burden of proving that a reduction in rates is required. Consumers also
believes that ABATE's request for refunds from 1995 to present is inappropriate
and unlawful; no such retroactive rate adjustment has ever been granted by the
MPSC. CMS Energy is unable to predict the outcome of this matter.
CONSUMERS GAS GROUP OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries excluding transportation to the MCV Facility and off-system
deliveries, to grow at an average annual rate of between one and two percent
over the next five years based primarily on a steadily growing customer base.
Actual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, particularly as a
result of industry restructuring, and the level of natural gas consumption.
Consumers also offers a variety of energy-related services to its customers
focused upon appliance maintenance, home safety, commodity choice and assistance
to customers purchasing heating, ventilation and air conditioning equipment.
RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a statewide three-year experimental gas transportation program,
eventually allowing 300,000 residential, commercial and industrial retail gas
sales customers to choose their gas supplier. For further information regarding
restructuring of the Gas Business, see Note 2, Uncertainties, "Consumers Gas
Group Matters-Gas Restructuring," incorporated by reference herein.
PANHANDLE OUTLOOK
The market for transmission of natural gas to the Midwest is increasingly
competitive and may become more so in light of projects in progress to increase
Midwest transmission capacity for gas originating in Canada and the Rocky
Mountain region. As a result, there continues to be pressure on prices charged
by
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Panhandle and an increasing necessity to discount the prices charged from the
legal maximum. Panhandle continues to be selective in offering discounts to
maximize revenues from existing capacity and to advance projects that provide
expanded services to meet the specific needs of customers. As a result of
Panhandle's new cost basis resulting from the merger with CMS Panhandle Holding,
which includes costs not likely to be considered for regulatory recovery, in
addition to the level of discounting being experienced by Panhandle, it no
longer meets the criteria of SFAS 71 and has discontinued application of SFAS
71. The discontinuance is not expected to materially affect CMS Energy's
financial position, liquidity, or results of operations.
REGULATORY MATTERS: For detailed information about Panhandle's regulatory
uncertainties see Note 2, Uncertainties - Panhandle Regulatory Matters,
incorporated by reference herein.
OTHER MATTERS
NEW ACCOUNTING RULES
Effective January 1, 1999, CMS Energy adopted EITF Issue 98-10, Accounting for
Energy Trading and Risk Management Activities, which requires mark-to-market
accounting for energy contracts entered into for trading purposes. Under
mark-to-market accounting, gains and losses resulting from changes in market
prices on contracts entered into for trading purposes are reflected in current
earnings. The after-tax mark-to-market adjustment resulting from the adoption of
EITF 98-10 has had an immaterial effect on CMS Energy's consolidated financial
position, results of operations and cash flows as of September 30, 1999. For
energy contracts that are hedges of non-trading activities, CMS Energy will
continue to use accrual accounting until it adopts SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, which will be effective January
1, 2001. CMS Energy is currently studying SFAS 133 and has not yet quantified
the effects of adoption on its financial statements and has not determined the
timing of or method of adoption.
YEAR 2000 COMPUTER MODIFICATIONS
CMS Energy uses software and related technologies throughout its domestic and
international businesses that the year 2000 date change could affect and, if
uncorrected, could cause CMS Energy to, among other things, delay issuance of
bills or reports, issue inaccurate bills, report inaccurate data, incur
generating plant outages, or create energy delivery uncertainties. In 1995, CMS
Energy established a Year 2000 Program to ensure the continued operation of its
businesses at the turn of the century. CMS Energy's efforts included dividing
the programs requiring modification between critical and noncritical programs. A
formal methodology was established to identify critical business functions and
risk scenarios, to correct problems identified, to develop test plans and
expected results, and to test the corrections made. CMS Energy's Year 2000
Program involves an aggressive, comprehensive four-phase approach, including
impact analysis, remediation, compliance review, and monitoring/contingency
planning.
The impact analysis phase includes the analysis, inventory, prioritization and
remediation plan development for all technology essential to core business
processes. The remediation phase involves testing and implementation of
remediated technology. A mainframe test environment was established in 1997 and
a test environment for network servers and stand-alone personal computers was
established in mid-1998. All essential corporate business systems have been, or
will be, tested in these test environments. The compliance review phase includes
the assembling of compliance documentation for each technology component as
remediation efforts are completed, and additional verification testing of
essential technology where necessary. The monitoring/contingency planning phase
includes compliance monitoring to ensure that year 2000 problems are not
reintroduced into remediated technology, as well as the development of
contingency plans to address reasonably likely risk scenarios.
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On March 29, 1999, CMS Energy acquired Panhandle. As part of CMS Energy's
acquisition due diligence, CMS Energy evaluated Panhandle's year 2000 compliance
program, which had been initiated in 1996. Management believes Panhandle is
devoting the necessary resources to achieve year 2000 readiness in a timely
manner. The status of Panhandle's Year 2000 Program by phase as of September 30,
1999, with target dates for completion and current percentage complete, are
included within the data presented for natural gas transmission.
STATE OF READINESS: CMS Energy is managing traditional Information Technology
(IT), which consists of essential business systems such as payroll, billing and
purchasing; and infrastructure, including mainframe, wide area network, local
area networks, personal computers, radios and telephone systems. CMS Energy is
also managing process control computers and embedded systems contained in
buildings, equipment and energy supply and delivery systems.
Essential goods and services for CMS Energy are electric fuel supply, gas fuel
supply, independent electric power supplies, facilities, electronic commerce,
telecommunications network carriers, financial institutions, purchasing vendors,
and software and hardware technology vendors. CMS Energy is addressing the
preparedness of these businesses and their risk through readiness assessment
questionnaires.
The status of CMS Energy's Year 2000 Program by phase, with target dates for
completion and current percentage complete based upon software and hardware
inventory counts as of September 30, 1999, is as follows:
Monitoring/
Impact Compliance Contingency
Analysis Remediation Review Planning
- ----------------------------------------------------------------------------------------------------------
(a) (b) (a) (b) (a) (b) (a) (b)
Electric utility 3/98 100% 6/99 100% 6/99 100% 6/99 100%
Gas utility 3/98 100% 6/99 100% 6/99 100% 6/99 100%
Independent power production 10/99 99% 10/99 97% 10/99 99% 9/99 100%
Oil and gas 9/99 100% 10/99 94% 10/99 96% 9/99 100%
Natural gas transmission 6/99 100% 10/99 99% 10/99 99% 9/99 100%
Marketing, services and trading 6/99 100% 10/99 99% 10/99 98% 10/99 90%
Essential goods and services 7/99 100% N/A N/A (c)
==========================================================================================================
(a) Target date for completion.
(b) Current percentage complete.
(c) Contingency planning for essential goods and services is incorporated into
contingency planning for each segment presented.
COST OF REMEDIATION: CMS Energy expenses the cost of software modifications as
incurred, and capitalizes and amortizes the cost of new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is
approximately $30 million. Costs incurred through September 30, 1999 were
approximately $26 million. CMS Energy's annual Year 2000 Program costs have
represented approximately 2 percent to 10 percent of CMS Energy's annual IT
budget through 1998 and are expected to represent approximately 25 percent of
CMS Energy's annual IT budget in 1999. Year 2000 compliance work is being funded
primarily from operations. To date, the commitment of CMS Energy resources to
the year 2000 issue has not deferred any material IT projects which could have a
material adverse affect on CMS Energy's financial position, liquidity or results
of operations.
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20
RISK ASSESSMENT: CMS Energy considers the most reasonably likely worst-case
scenarios to be: i) a lack of communications to dispatch crews to electric or
gas emergencies; ii) a lack of communications to generating units to balance
electrical load; iii) power shortages due to the lack of stability of the
electric grid; and iv) a failure of fuel suppliers to deliver fuel to generating
facilities. These scenarios could result in CMS Energy not being able to
generate or distribute enough energy to meet customer demand for a period of
time, which could result in lost sales and profits, as well as legal liability.
Year 2000 remediation and testing efforts are concentrating on these risk areas
and will continue through the end of 1999. Contingency plans are substantially
in place and will be executed, if necessary, to further mitigate the risks
associated with these scenarios.
CONTINGENCY PLANS: Contingency planning efforts are currently underway for all
business systems and providers of essential goods and services. Extensive
contingency plans are already in place in many locations and are currently being
revised for reasonably likely worst-case scenarios related to year 2000 issues.
In many cases, Consumers already has arrangements with multiple vendors of
similar goods and services in anticipation that if one cannot meet its
commitments, others may be able to. Current contingency plans provide for manual
dispatching of crews and manual coordination of electrical load balancing and
have been revised to provide for radio or satellite communications. Coordinated
contingency planning efforts are in progress with third parties to minimize risk
to electric generation, transmission and distribution systems.
EXPECTATIONS: CMS Energy does not expect that the cost of these modifications
will materially affect its financial position, liquidity, or results of
operations. There can be no guarantee, however, that these costs, plans or time
estimates will be achieved, and actual results could differ materially.
Because of the integrated nature of CMS Energy's business with other energy
companies, utilities, jointly owned facilities operated by other entities, and
business conducted with suppliers and large customers, CMS Energy may be
indirectly affected by year 2000 compliance complications.
FOREIGN CURRENCY TRANSLATION
CMS Energy adjusts common stockholders' equity to reflect foreign currency
translation adjustments for the operation of long-term investments in foreign
countries. The adjustment is primarily due to the exchange rate fluctuations
between the U.S. dollar and each of the Australian dollar, Brazilian real and
Argentine peso. From January 1, 1999 through September 30, 1999, the change in
the foreign currency translation adjustment totaled $1 million, net of after-tax
hedging proceeds. Although management currently believes that the currency
exchange rate fluctuations over the long term will not have a material adverse
affect on CMS Energy's financial position, liquidity or results of operations,
CMS Energy has hedged its exposure to the Australian dollar, the Brazilian real
and the Argentine peso. CMS Energy uses forward exchange contracts and collared
options to hedge certain receivables, payables, long-term debt and equity value
relating to foreign investments. The notional amount of the outstanding foreign
exchange contracts was $1.7 billion at September 30, 1999, which includes $330
million, $350 million and $880 million for Australian, Brazilian and Argentine
foreign exchange contracts, respectively. The estimated fair value of the
foreign exchange and option contracts at September 30, 1999 was $24 million,
representing the amount CMS Energy would pay upon settlement.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "expects," "intends," and "plans," as well as variations of such
words and similar expressions, are intended to identify forward-looking
statements that
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21
involve risk and uncertainty. CMS Energy bases these statements upon various
assumptions involving judgements with respect to the future including, among
others, the ability to achieve operating synergies and revenue enhancements;
international, national, regional and local economic, political, competitive and
regulatory conditions and developments; capital and financial market conditions,
including currency exchange controls and interest rates; weather conditions and
other natural phenomena; adverse regulatory or legal decisions, including
environmental and tax laws and regulations; the pace of deregulation of the
natural gas and electric industries; energy markets, including the timing and
extent of changes in commodity prices for oil, coal, natural gas, natural gas
liquids, electricity and certain related products; the timing and success of
business development efforts; potential disruption, expropriation or
interruption of facilities or operations due to accidents or political events;
nuclear power performance and regulation; technological developments in energy
production, delivery, and usage; the effect of changes in accounting policies;
year 2000 readiness; and other uncertainties, all of which are difficult to
predict and many of which are beyond the control of CMS Energy. Accordingly,
while CMS Energy believes that the assumed results are reasonable, there can be
no assurance that they will approximate actual results. CMS Energy disclaims any
obligation to update or revise forward-looking statements, whether as a result
of new information, future events or otherwise. Certain risk factors are
detailed from time to time in various public filings made by CMS Energy with the
SEC.
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
September 30 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
OPERATING REVENUE
Electric utility $ 753 $ 729 $ 2,052 $ 1,990 $ 2,667 $ 2,617
Gas utility 112 117 792 716 1,128 1,092
Natural gas transmission, storage and processing 233 20 546 69 637 94
Independent power production 103 95 261 214 324 266
Oil and gas exploration and production 25 15 69 46 86 72
Marketing, services and trading 216 305 520 748 711 1,074
Other 46 5 139 9 176 11
----------------------------------------------------------------------------
1,488 1,286 4,379 3,792 5,729 5,226
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 116 109 315 273 401 359
Purchased power - related parties 140 143 418 433 559 585
Purchased and interchange power 151 248 357 492 449 569
Cost of gas sold 306 154 1,078 799 1,491 1,325
Other 250 200 707 558 912 744
----------------------------------------------------------------------------
963 854 2,875 2,555 3,812 3,582
Maintenance 53 49 141 128 189 180
Depreciation, depletion and amortization 141 112 429 347 566 472
General taxes 60 49 186 155 246 209
----------------------------------------------------------------------------
1,217 1,064 3,631 3,185 4,813 4,443
- ------------------------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 168 153 425 378 522 468
Gas utility (7) 6 87 81 132 134
Independent power production 51 57 120 123 141 152
Natural gas transmission, storage and processing 51 6 102 28 107 33
Oil and gas exploration and production 5 2 13 12 7 22
Marketing, services and trading - 2 1 2 3 (4)
Other 3 (4) - (17) 4 (22)
----------------------------------------------------------------------------
271 222 748 607 916 783
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion income 1 1 3 5 5 7
Accretion expense (4) (4) (11) (12) (15) (16)
Loss on MCV power purchases - - - (37) - (37)
Other, net (1) (3) 17 2 15 (6)
----------------------------------------------------------------------------
(4) (6) 9 (42) 5 (52)
- ------------------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 135 79 365 234 449 309
Other interest 17 8 37 33 52 48
Capitalized interest (11) (6) (34) (17) (46) (21)
Preferred dividends - 5 6 14 10 19
Preferred securities distributions 18 8 35 24 43 31
----------------------------------------------------------------------------
159 94 409 288 508 386
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 108 122 348 277 413 345
INCOME TAXES 25 41 92 86 106 95
----------------------------------------------------------------------------
CONSOLIDATED NET INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 83 81 256 191 307 250
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
PROPERTY TAXES, NET OF $23 TAX - - - 43 - 43
----------------------------------------------------------------------------
CONSOLIDATED NET INCOME $ 83 $ 81 $ 256 $ 234 $ 307 $ 293
====================================================================================================================================
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THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
September 30 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKS CMS ENERGY $ 86 $ 83 $ 248 $ 226 $ 294 $ 279
CLASS G $ (3) $ (2) $ 8 $ 8 $ 13 $ 14
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING CMS ENERGY 109 102 109 101 108 101
CLASS G 9 8 9 8 9 8
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER AVERAGE COMMON CMS ENERGY $ .79 $ .81 $ 2.29 $ 1.83 $ 2.73 $ 2.37
SHARE BEFORE CHANGE IN ACCOUNTING PRINCIPLE CLASS G $ (.38) $ (.16) $ .90 $ .68 $ 1.41 $ 1.37
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX, PER AVERAGE CMS ENERGY $ - $ - $ - $ .40 $ - $ .40
COMMON SHARE CLASS G $ - $ - $ - $ .36 $ - $ .36
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER AVERAGE CMS ENERGY $ .79 $ .81 $ 2.29 $ 2.23 $ 2.73 $ 2.77
COMMON SHARE CLASS G $ (.38) $ (.16) $ .90 $ 1.04 $ 1.41 $ 1.73
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER AVERAGE CMS ENERGY $ .78 $ .80 $ 2.25 $ 2.19 $ 2.70 $ 2.73
COMMON SHARE CLASS G $ (.38) $ (.16) $ .90 $ 1.04 $ 1.41 $ 1.73
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE CMS ENERGY $ .365 $ .33 $ 1.025 $ .93 $ 1.355 $ 1.23
CLASS G $ .34 $ .325 $ .99 $ .945 $ 1.315 $ 1.255
====================================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-19
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 256 $ 234 $ 307 $ 293
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $38, $38, $50 and $51, respectively) 429 347 566 472
Loss on MCV power purchases - 37 - 37
Capital lease and debt discount amortization 36 29 58 37
Accretion expense 11 12 15 16
Accretion income - abandoned Midland project (3) (5) (4) (7)
Cumulative effect of accounting change - (66) - (66)
MCV power purchases (45) (48) (61) (63)
Undistributed earnings of related parties (70) (36) (129) (54)
Deferred income taxes and investment tax credit 16 61 9 74
Other 3 (8) 17 (7)
Changes in other assets and liabilities (193) (171) (208) (56)
---------------------------------------------------
Net cash provided by operating activities 440 386 570 676
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Aquisition of companies net of cash acquired (1,899) - (1,899) -
Capital expenditures (excludes assets placed under capital lease) (479) (448) (1,326) (617)
Investments in partnerships and unconsolidated subsidiaries (291) (234) (402) (476)
Cost to retire property, net (62) (65) (80) (68)
Other 11 1 42 2
Proceeds from sale of property 2 56 3 59
---------------------------------------------------
Net cash used in investing activities (2,718) (690) (3,662) (1,100)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds and other long-term debt 2,415 1,273 2,845 1,725
Issuance of common stock 72 49 292 213
Retirement of bonds and other long-term debt (47) (621) (87) (1,069)
Borrowings (repayments) of lines of credit, net (185) (157) 43 (219)
Increase (decrease) in notes payable, net (11) (80) 16 (92)
Payment of common stock dividends (162) (102) (200) (134)
Payment of capital lease obligations (28) (26) (38) (35)
Retirement of preferred stock (194) - (194) -
Retirement of common stock - - (3) -
Proceeds from trust preferred securities 551 - 551 -
---------------------------------------------------
Net cash provided by financing activities 2,411 336 3,225 389
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 133 32 133 (35)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 101 69 101 136
---------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 234 $ 101 $ 234 $ 101
==================================================================================================================================
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OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 311 $ 229 $ 395 $ 321
Income taxes paid (net of refunds) 54 51 54 61
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ 2 $ 21 $ 27 $ 21
Other assets placed under capital leases 11 11 14 12
Common stock issued to acquire companies - - 61 -
Assumption of debt 305 - 393 -
==================================================================================================================================
All highly liquid investments with an original maturity of three months or less are considered cash equivalents.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30 SEPTEMBER 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric utility $ 6,920 $ 6,720 $ 6,641
Gas utility 2,427 2,360 2,328
Natural gas transmission, storage and processing 1,912 341 170
Oil and gas properties (successful efforts method) 725 670 637
Independent power production 593 518 271
Other 422 373 49
-----------------------------------------------
12,999 10,982 10,096
Less accumulated depreciation, depletion and amortization 6,018 5,213 5,052
-----------------------------------------------
6,981 5,769 5,044
Construction work-in-progress 413 271 226
-----------------------------------------------
7,394 6,040 5,270
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 1,019 888 868
Natural gas transmission, storage and processing 564 494 341
International energy distribution 133 209 272
Midland Cogeneration Venture Limited Partnership 240 209 199
First Midland Limited Partnership 238 240 237
Other 34 33 35
-----------------------------------------------
2,228 2,073 1,952
- ---------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 234 101 101
Accounts receivable, notes receivable and accrued revenue, less
allowances of $12, $13 and $8, respectively 1,023 720 457
Inventories at average cost
Gas in underground storage 288 219 276
Materials and supplies 144 99 91
Generating plant fuel stock 37 43 29
Deferred income taxes 13 - 14
Prepayments and other 222 225 170
-----------------------------------------------
1,961 1,407 1,138
- ---------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Nuclear decommissioning trust funds 572 557 510
Unamortized nuclear costs 506 - -
Postretirement benefits 351 373 381
Abandoned Midland Project 53 71 77
Other 1,529 789 602
-----------------------------------------------
3,011 1,790 1,570
-----------------------------------------------
TOTAL ASSETS $ 14,594 $ 11,310 $ 9,930
=================================================================================================================================
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STOCKHOLDERS' INVESTMENT AND LIABILITIES SEPTEMBER 30 SEPTEMBER 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholders' equity $ 2,353 $ 2,216 $ 1,922
Preferred stock of subsidiary 44 238 238
Company-obligated mandatorily redeemable Trust Preferred Securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 120
Company-obligated convertible Trust Preferred Securities of:
CMS Energy Trust I (b) 173 173 173
CMS Energy Trust II (b) 301 - -
Company-obligated Trust Preferred Securities of CMS RHINOS Trust (c) 250 - -
Long-term debt 7,092 4,726 4,248
Non-current portion of capital leases 89 105 77
------------------------------------------------
10,522 7,678 6,878
- ---------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 308 293 171
Notes payable 317 328 302
Accounts payable 466 501 309
Accrued taxes 215 272 144
Accrued interest 114 65 64
Accounts payable - related parties 58 79 90
Power purchases 47 47 47
Accrued refunds 19 11 12
Other 447 211 189
------------------------------------------------
1,991 1,807 1,328
- ---------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 646 652 654
Postretirement benefits 479 489 499
Deferred investment tax credit 129 135 144
Regulatory liabilities for income taxes, net 121 87 83
Power purchases 87 121 134
Other 619 341 210
------------------------------------------------
2,081 1,825 1,724
------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 14,594 $ 11,310 $ 9,930
=================================================================================================================================
(a) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36 percent subordinated deferrable interest notes due 2015
from Consumers. The primary asset of Consumers Energy Company Financing II is
$124 million principal amount of 8.20 percent subordinated deferrable interest
notes due 2027 from Consumers. For further discussion, see Note 3 to the
Consolidated Financial Statements.
(b) The primary asset of CMS Energy Trust I is $178 million principal amount of
7.75 percent convertible subordinated debentures due 2027 from CMS Energy. The
primary asset of CMS Energy Trust II is $310 million principal amount of 8.625
percent convertible junior subordinated debentures due July 2004 from CMS
Energy. For further discussion, see Note 3 to the Consolidated Financial
Statements.
(c) As described in Note 3, the primary asset of CMS RHINOS Trust is $258
million principal amount of LIBOR plus 1.75 percent subordinated debentures due
September 2001 from CMS Energy.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-23
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 2,643 2,297 2,594 2,267 2,316 2,103
Redemption of affiliate's preferred stock - - (2) - (2) -
Common stock reacquired - - - - (3) -
Common stock reissued 2 - 2 - 2 -
Common stock issued:
CMS Energy 20 18 67 45 346 206
Class G 1 1 5 4 7 7
-----------------------------------------------------------------------------
At end of period 2,666 2,316 2,666 2,316 2,666 2,316
- ------------------------------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 10 (6) (9) (6) (16) (4)
Change in unrealized investment-gain (loss) (a) (7) (10) 12 (10) 19 (12)
-----------------------------------------------------------------------------
At end of period 3 (16) 3 (16) 3 (16)
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (126) (123) (136) (96) (132) (45)
Change in foreign currency translation (a) (11) (9) (1) (36) (5) (87)
-----------------------------------------------------------------------------
At end of period (137) (132) (137) (132) (137) (132)
- ------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (138) (292) (234) (379) (247) (406)
Consolidated net income (a) 83 81 256 234 307 293
Common stock dividends declared:
CMS Energy (122) (33) (193) (94) (228) (123)
Class G (3) (3) (9) (8) (12) (11)
-----------------------------------------------------------------------------
At end of period (180) (247) (180) (247) (180) (247)
-----------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 2,353 $ 1,922 $ 2,353 $ 1,922 $ 2,353 $ 1,922
====================================================================================================================================
(A) DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investment-gain (loss), net of
tax of $4, $5, $(6), $5, $(9) and $6,
respectively $ (7) $ (10) $ 12 $ (10) $ 19 $ (12)
Foreign currency translation (11) (9) (1) (36) (5) (87)
Consolidated net income 83 81 256 234 307 293
-----------------------------------------------------------------------------
Total Consolidated Comprehensive Income $ 65 $ 62 $ 267 $ 188 $ 321 $ 194
=============================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-24
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CMS ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the 1998 Form 10-K of CMS Energy, which includes the Reports of Independent
Public Accountants. Certain prior year amounts have been reclassified to conform
with the presentation in the current year. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure the
fair presentation of financial position, results of operations and cash flows
for the periods presented.
1: CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CMS Energy Corporation is the parent holding company of Consumers and
Enterprises. Consumers, a combination electric and gas utility company serving
the Lower Peninsula of Michigan, is a subsidiary of CMS Energy. Enterprises,
through subsidiaries, is engaged in several domestic and international
energy-related businesses including: natural gas transmission, storage and
processing; independent power production; oil and gas exploration and
production; energy marketing, services and trading; and international energy
distribution. In March 1999, CMS Energy completed the acquisition of Panhandle,
as discussed further below. Panhandle is primarily engaged in the interstate
transportation, storage and processing of natural gas.
The consolidated financial statements include CMS Energy, Consumers and
Enterprises and their majority owned subsidiaries. The financial statements are
prepared in conformity with generally accepted accounting principles and use
management's estimates where appropriate. Affiliated companies (where CMS Energy
has more than 20 percent but less than a majority ownership interest) are
accounted for by the equity method. For the three, nine and twelve-month periods
ended September 30, 1999, undistributed equity earnings were $24 million, $70
million and $129 million, respectively, compared to $2 million, $36 million and
$54 million for the three, nine and twelve-month periods ended September 30,
1998.
Foreign currency translation adjustments relating to the operation of CMS
Energy's long-term investments in foreign countries are included in common
stockholders' equity. From January 1, 1999 through September 30, 1999, the
change in the foreign currency translation adjustment totaled $1 million, net of
after-tax hedging proceeds.
NEW ACCOUNTING RULES
In 1999, CMS Energy implemented SOP 98-1, Accounting for the Costs of Computer
Software Developed for Internal Use, and SOP 98-5, Reporting on the Costs of
Start-Up Activities. Application of these standards has not had a material
effect on CMS Energy's financial position, liquidity, or results of operations.
Effective January 1, 1999, CMS Energy adopted EITF Issue 98-10, Accounting for
Energy Trading and Risk Management Activities, which requires mark-to-market
accounting for energy contracts entered into for trading purposes. Under
mark-to-market accounting, gains and losses resulting from
CMS-25
31
changes in market prices on contracts entered into for trading purposes are
reflected in current earnings. The after-tax mark-to-market adjustment resulting
from the adoption of EITF 98-10 had an immaterial effect on CMS Energy's
consolidated financial position, results of operations and cash flows as of
September 30, 1999. For energy contracts that are hedges of non-trading
activities, CMS Energy will continue to use accrual accounting until it adopts
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, which
will be effective January 1, 2001.
OIL AND GAS PROPERTIES
CMS Oil and Gas follows the successful efforts method of accounting for its
investments in oil and gas properties. CMS Oil and Gas capitalizes the costs of
property acquisitions, successful exploratory wells, all development costs, and
support equipment and facilities when incurred. It expenses unsuccessful
exploratory wells when they are determined to be non-productive. CMS Oil and Gas
also charges to expense production costs, overhead, and all exploration costs
other than exploratory drilling as incurred. Depreciation, depletion and
amortization of proved oil and gas properties is determined on a field-by-field
basis using the units-of-production method over the life of the remaining proved
reserves.
UTILITY REGULATION
Consumers accounts for the effects of regulation based on a regulated utility
accounting standard (SFAS 71). As a result, the actions of regulators affect
when Consumers recognizes revenues, expenses, assets and liabilities.
In March 1999, Consumers received MPSC electric restructuring orders which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Consistent with these orders, Consumers expected to
implement retail open access for its electric customers in September 1999, and
therefore, Consumers discontinued application of SFAS 71 for the energy supply
portion of its business in the first quarter of 1999. Discontinuation of SFAS 71
for the energy supply portion of Consumers' business resulted in Consumers
reducing the carrying value of its Palisades plant-related assets by
approximately $535 million and established a regulatory asset for a
corresponding amount. The regulatory asset is collectible as part of the
Transition Costs which are recoverable through the regulated transmission and
distribution portion of Consumers' business as approved by an MPSC order in
1998. This order also allowed Consumers to recover any energy supply-related
regulatory assets, plus a return on any unamortized balance of those assets,
from its transmission and distribution customers. According to current
accounting standards, Consumers can continue to carry its energy supply-related
regulatory assets or liabilities for the part of the business subject to
regulatory change if legislation or an MPSC rate order allows the collection of
cash flows, to recover specific costs or to settle obligations, from its
regulated transmission and distribution customers. At September 30, 1999,
Consumers had a net investment in energy supply facilities of $934 million
included in electric plant and property.
ACQUISITION
In March 1999, CMS Energy completed the acquisition of Panhandle from Duke
Energy for a cash payment of $1.9 billion and existing Panhandle debt of $300
million. The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the purchase price has been preliminarily allocated to
the assets purchased and the liabilities assumed based upon their fair values at
the date of acquisition, with the tentative excess purchase price of
approximately $700 million classified as goodwill to be amortized on a
straight-line basis over a period of forty years.
CMS-26
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The following unaudited pro forma amounts for operating revenue, consolidated
net income, basic earnings per share, diluted earnings per share and total
assets, as if the acquisition had occurred on January 1, 1998, illustrate the
effects of: (1) various restructuring, realignment, and elimination of
activities between Panhandle and Duke Energy prior to the closing of the
acquisition by CMS Energy; (2) the adjustments resulting from the acquisition by
CMS Energy; and (3) financing transactions which include the public issuance of
$800 million of senior notes by Panhandle, $850 million of senior notes by CMS
Energy, and the private sale of $250 million of Trust Preferred Securities by
CMS Energy.
In Millions, except per share amounts
- -------------------------------------------------------------------------------------------
Three Months Nine Months Year ended
Ended September 30, Ended September 30, December 31,
1999 1998 1999 1998 1998
- -------------------------------------------------------------------------------------------
Operating revenue $ 1,488 $ 1,376 $4,492 $4,096 $ 5,566
Consolidated net income 83 72 267 237 289
Basic earnings per share .79 .72 2.38 2.26 2.70
Diluted earnings per share .78 .71 2.35 2.22 2.67
- -------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998 1998
- -------------------------------------------------------------------------------------------
Total assets $14,594 $12,367 $13,784
- -------------------------------------------------------------------------------------------
2: UNCERTAINTIES
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and nitrogen oxides and requires emissions and air quality monitoring.
Consumers currently operates within these limits and meets current emission
requirements. The Clean Air Act requires the EPA to periodically review the
effectiveness of the national air quality standards in preventing adverse health
effects. In 1997 the EPA revised these standards to impose further limitations
on nitrogen oxide and small particulate-related emissions. In May 1999 a United
States Court of Appeals ruled that the grant of authority to the EPA to revise
the standards as the EPA did, would amount to an unconstitutional delegation of
legislative power. As a result, the standards will not be implemented under the
1997 rule. The EPA has requested a rehearing of the court's decision.
In September 1998, based in part upon the 1997 standards, the EPA Administrator
issued final regulations requiring the State of Michigan to further limit
nitrogen oxide emissions. Fossil-fueled emitters, such as Consumers' generating
units, anticipated a reduction in nitrogen oxide emissions by 2003 to only 32
percent of levels allowed for the year 2000. The State of Michigan had one year
to submit an implementation plan. The State of Michigan filed a lawsuit
objecting to the extent of the required emission reductions and requesting an
extension of the submission date. In May 1999 the United States Court of Appeals
granted an indefinite stay of the submission date for the State of Michigan's
implementation plan. Based upon the recent court rulings,
CMS-27
33
it is unlikely that the State of Michigan will establish Consumers' nitrogen
oxide emissions reduction target until late 1999. Until this target is
established, the estimated cost of compliance discussed below is subject to
revision.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions to the level proposed by the State of Michigan for
Consumers' fossil-fueled generating units ranges from $150 million to $290
million, in 1999 dollars. If Consumers had to meet the EPA's 1997 proposed
requirements it is estimated that the cost to Consumers would be between $290
million and $500 million, in 1999 dollars. In both these cases the lower
estimate represents the capital expenditure level that would satisfactorily meet
the proposed emissions limits but would result in higher operating expense. The
higher estimate in the range includes expenditures that result in lower
operating costs while complying with the proposed emissions limit. Consumers
anticipates that these capital expenditures will be incurred between 1999 and
2004, or between 1999 and 2003 if the EPA's limits are imposed.
Consumers may need an equivalent amount of capital expenditures to comply with
the new small particulate standards some time after 2004 if those standards
become effective.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. During the past few years, in order to comply with
the Clean Air Act, Consumers incurred capital expenditures totaling $55 million
to install equipment at certain generating units. Consumers estimates an
additional $16 million of capital expenditures for ongoing and proposed
modifications at the remaining coal-fueled units to meet year 2000 requirements.
Management believes that these expenditures will not materially affect
Consumers' annual operating costs.
Under the Michigan Natural Resources and Environmental Protection Act, Consumers
expects that it will ultimately incur investigation and remedial action costs at
a number of sites. Nevertheless, it believes that these costs are properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated
sites administered under Superfund. Superfund liability is joint and several;
along with Consumers, many other creditworthy, potentially responsible parties
with substantial assets cooperate with respect to the individual sites. Based
upon past negotiations, Consumers estimates that its share of the total
liability for the known Superfund sites will be between $2 million and $9
million. At September 30, 1999, Consumers has accrued the minimum amount of the
range for its estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and PCBs. The cost of removal and
disposal of these materials is currently unknown. There may be some radioactive
portion of these materials, which no facility in the United States will
currently accept. The cost of removal and disposal will constitute part of the
cost to decommission the plant and will be paid from the decommissioning fund.
Consumers is studying the extent of the contamination and reviewing options.
ANTITRUST: In October 1997, two independent power producers sued Consumers in a
federal court. The suit alleged antitrust violations relating to contracts,
which Consumers entered into with some of its customers and claims relating to
power facilities. On March 31, 1999, the court issued an opinion and order
granting Consumers' motion for summary judgment, resulting in the dismissal of
the case. The plaintiffs have appealed this decision.
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CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs associated with the purchase of the additional 325 MW
of MCV Facility capacity (see "Power Purchases from the MCV Partnership" in this
Note) and to recover its nuclear plant investment by increasing prospective
annual nuclear plant depreciation expense by $18 million, with a corresponding
decrease in fossil-fueled generating plant depreciation expense. It also
established an experimental direct-access program. Customers having a maximum
demand of 2 MW or greater are eligible to purchase generation services directly
from any eligible third-party power supplier and Consumers will transmit the
power for a fee. The direct-access program is limited to 134 MW of load. In
accordance with the MPSC order, Consumers held a lottery in April 1997 to select
the customers to participate in the direct-access program. Subsequently, direct
access for a portion of this 134 MW began in late 1997. The program was
substantially filled by the end of March 1999. The Attorney General, ABATE, the
MCV Partnership and other parties filed appeals with the Court of Appeals
challenging the MPSC's 1996 order. In August 1999, the Court of Appeals affirmed
the MPSC's 1996 order in all respects. In October 1999, the Attorney General
filed an application for leave to appeal this decision to the Michigan Supreme
Court.
In January 1998, the Court of Appeals affirmed an MPSC conclusion that the MPSC
has statutory authority to authorize an experimental electric retail wheeling
program. In June 1999, the Michigan Supreme Court reversed the Court of Appeals
and vacated the 1995 MPSC retail wheeling orders. The Court found that the MPSC
does not have the statutory authority to order a mandatory retail wheeling
program.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC in June
1997 issued an order proposing that beginning January 1, 1998 Consumers transmit
and distribute energy on behalf of competing power suppliers to retail
customers. Further restructuring orders issued in late 1997 and early 1998
provide for: 1) recovery of estimated Transition Costs of $1.755 billion through
a charge to all customers purchasing their power from other sources until the
end of the transition period in 2007, subject to an adjustment through a true-up
mechanism; 2) commencement of the phase-in of retail open access in 1998
(subsequently extended to September 1999); 3) suspension of the PSCR process as
discussed below; and 4) the right of all customers to choose their power
suppliers on January 1, 2002. The recovery of costs of implementing a retail
open access program, preliminarily estimated at an additional $200 million,
would be reviewed for prudence and recovered via a charge approved by the MPSC.
Nuclear decommissioning costs would also continue to be collected through a
separate surcharge to all customers.
In June 1998, Consumers submitted its plan for implementing retail open access
to the MPSC. The primary issues addressed in the plan are: 1) the implementation
schedule; 2) the retail open access service options available to customers and
suppliers; 3) the process and requirements for customers and others to obtain
retail open access service; and 4) the roles and responsibilities for Consumers,
customers and suppliers. In March 1999, Consumers received MPSC electric
restructuring orders, which generally supported Consumers' implementation plan.
Consumers began implementing electric retail customer open access in September
1999, and will extend open access to 750 MW of Consumers' retail market by 2001.
On January 1, 2002, all of Consumers' electric customers will have the right to
choose generation suppliers.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders. Because of the June 1999 Michigan Supreme Court
decision described above in "Electric Proceedings", Consumers believes that the
MPSC lacks statutory authority to mandate industry restructuring. Although
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Consumers filed an appeal of the restructuring orders which asked the court to
rule that the MPSC could not mandate industry restructuring, Consumers has
subsequently requested to have that appeal dismissed. Subsequent to the June
1999 Michigan Supreme Court decision, the MPSC requested comments from any
interested party concerning the effect of the Supreme Court's decision on these
matters. Following receipt of comments, the MPSC issued an order on August 17,
1999 finding that it has jurisdiction to approve rates, terms, and conditions
for electricity retail wheeling (also known as electric customer choice) if a
utility voluntarily chooses to offer that service. The August 17th order also
requested that Consumers file a statement if it intended to continue with its
electric customer choice program. On September 1, 1999 Consumers filed a
statement reaffirming its decision to continue carrying out the customer choice
program as previously approved by the MPSC. ABATE and the Attorney General have
each appealed the August 17th order to the Court of Appeals. Both ABATE and the
Attorney General subsequently filed applications with the Michigan Supreme Court
asking that Court to bypass the Court of Appeals and immediately review the
lawfulness of the August 17th order. It is uncertain how the issues raised by
the MPSC's August 17th order will be resolved by the regulatory process, the
appellate courts or by legislation codifying the retail wheeling and related
Transition Cost recovery issues.
Several bills relative to electric restructuring have been introduced in the
Michigan legislature for consideration in the 1999-2000 legislative session.
Although Consumers has not specifically supported any of these bills, Consumers
believes legislation is desirable to provide statutory support for the MPSC
orders. Consumers is uncertain as to whether legislation will be enacted and
what effect any enacted legislation will have on Consumers. Similar uncertainty
exists with respect to the possibility that federal legislation restructuring
the electric power industry will be enacted. A variety of bills changing
existing federal regulation of the industry and potentially affecting state
regulation have been introduced in Congress in recent years. None has been
enacted.
Consumers believes progress is being made in discussions with its major
commercial and industrial customers, which, if successful, would result in
agreement on the need for, and substance of, electric restructuring legislation
in Michigan and have the effect of resolving Consumers' rate proceedings pending
before the MPSC. While there are no assurances that an agreement or legislation
will result, Consumers is optimistic that a positive outcome of the discussions
can be achieved. CMS Energy cannot predict the outcome of electric restructuring
on it's financial position, liquidity, or results of operations.
As a result of a 1998 MPSC order in connection with the electric restructuring
program, the PSCR process was suspended. Under this suspension, customers
previously subject to the PSCR mechanism will not have their rates adjusted to
reflect the actual costs of fuel and purchased and interchanged power during the
1998-2001 period. In prior years, when the PSCR process was employed, any change
in power supply costs was passed through to customers. In order to reduce the
risk of high energy prices during peak demand periods, Consumers purchased daily
call options, at a cost of approximately $19 million, to insure a reliable
source of energy during the months of June through September 1999, and expects
to use a similar strategy in the future. Consumers is planning to have
sufficient generation and purchased capacity for approximately a 15 percent
reserve margin in order to provide reliable service to its electric service
customers and to protect itself against unscheduled plant outages. Under certain
circumstances, the cost of purchasing energy on the spot market could be
substantial.
In June 1999, Consumers and four other electric utility companies sought
approval from the FERC to form the Alliance Regional Transmission Organization.
The proposed structure will provide for the creation of a transmission entity
that would control, operate and own transmission facilities of one or more of
the member companies, and would control and operate, but not necessarily own,
the transmission facilities of
CMS-30
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other companies. The proposal is structured to give the member companies the
flexibility to maintain or divest ownership of their transmission facilities
while ensuring independent operation of the regional transmission system. The
member companies have requested the FERC to approve the proposed request by
December 31, 1999. Consumers is uncertain of the outcome of this matter.
OTHER CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings-
In Millions
- ----------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------
Pretax operating income $13 $13 $39 $36 $52 $46
Income taxes and other 4 4 12 11 16 14
- ----------------------------------------------------------------------------------------------
Net income $9 $9 $27 $25 $36 $32
==============================================================================================
Power Purchases from the MCV Partnership- Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, Consumers has been permitted by the MPSC to recover capacity charges
averaging 3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed
and variable energy charges. Since January 1, 1996, Consumers also has been
permitted to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. Because
the MPSC has already approved recovery of these capacity costs, Consumers will
recover these increases through an adjustment to the currently frozen PSCR
factor that will be effective through 2001. Consumers expects to recover the
remaining increases through the Transition Cost true-up process and through
further adjustments to the PSCR factor. After September 2007, under the terms of
the PPA, Consumers will only be required to pay the MCV Partnership capacity and
energy charges that the MPSC has authorized for recovery from electric
customers.
In March 1999, Consumers signed a long-term power sales agreement to resell to
PECO its capacity and energy purchases under the PPA until September 2007. After
a three-year transition period during which 100 to 150 MW will be sold to PECO,
beginning in 2002 Consumers will sell all 1,240 MW of PPA capacity and
associated energy to PECO. In March 1999, Consumers also filed an application
with the MPSC for accounting and ratemaking approvals related to the PECO
agreement. If used as an offset to electric customers Transition Cost
responsibility, Consumers estimates that there could be a reduction of as much
as $58 million (on a net present value basis) of Transition Cost related to the
MCV PPA. In an order
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issued in April 1999, the MPSC conditionally approved the requests for
accounting and rate-making treatment to the extent that customer rates are not
increased from their level absent the agreement and as modified by the order. In
response to Consumers' and other parties' requests for clarification and
rehearing, in an August 1999 opinion, the MPSC partially granted the relief
Consumers requested on rehearing and attached certain additional conditions to
its approval. Those conditions relate to Consumers continued decision to carry
out the electricity customer choice program (which Consumers has affirmed as
discussed above) and a determination to revise its capacity solicitation process
(which Consumers has filed but is awaiting an MPSC decision). The August opinion
is a companion order to a power supply cost reconciliation order issued on the
same date in another case. This order affects the level of frozen power supply
costs recoverable in rates during future years when the transaction with PECO
would be taking place. Consumers filed a motion for clarification of the order
relating to the PECO agreement.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC recovery
orders. At September 30, 1999 and September 30, 1998, the remaining after-tax
present value of the estimated future PPA liability associated with the 1992
loss totaled $87 million and $118 million, respectively. At September 30, 1999,
the undiscounted after-tax amount associated with this liability totaled $148
million. These after-tax cash underrecoveries are based on the assumption that
the MCV Facility would be available to generate electricity 91.5 percent of the
time over its expected life. Historically the MCV Facility has operated above
the 91.5 percent level. Accordingly, in 1998, Consumers increased its PPA
liability by $37 million. Because the MCV Facility operated above the 91.5
percent level in 1998 and thus far in 1999, Consumers has an accumulated
unrecovered after-tax shortfall of $24 million as of September 30, 1999.
Consumers believes that this shortfall will be resolved as part of the electric
restructuring effort. If the MCV Facility generates electricity at the 91.5
percent level during the next five years, Consumers' after-tax cash
underrecoveries associated with the PPA would be as follows.
In Millions
- -----------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
- -----------------------------------------------------------------------------------------
Estimated cash underrecoveries, net of tax $35 $21 $20 $19 $18
=========================================================================================
If the MCV Facility operates at availability levels above management's 91.5
percent estimate made in 1992 for the remainder of the PPA, Consumers will need
to recognize additional losses for future underrecoveries. In March 1999,
Consumers and the MCV Partnership reached an agreement effective January 1, 1999
that will cap availability payments to the MCV Partnership at 98.5 percent. For
further discussion on the impact of the frozen PSCR, see "Electric
Restructuring" in this Note. Management is evaluating the adequacy of the
contract loss liability considering actual MCV Facility operations and any other
relevant circumstances.
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders in the electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the U.S.
District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. In July 1999, the U.S. District Court
issued an order granting the MCV Partnership's motion for summary judgment. The
order permanently prohibits two of the incumbent commissioners from enforcing
the restructuring orders in any manner which denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or which
precludes the MCV Partnership from recovering the avoided cost rate.
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NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good.
The NRC suspended this same assessment process for all licensees in 1998. Until
such time as the NRC completes its review of processes for assessing performance
at nuclear power plants, the Plant Performance Review is being used to provide
an assessment of licensee performance. Palisades received its annual performance
review dated March 26, 1999 in which the NRC stated that the overall performance
at Palisades was acceptable.
Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity.
Consequently, Consumers is using NRC-approved steel and concrete vaults,
commonly known as "dry casks", for temporary on-site storage. As of September
30, 1999 Consumers had loaded 18 dry storage casks with spent nuclear fuel at
Palisades. In June 1997, the NRC approved Consumers' process for unloading spent
fuel from a cask previously discovered to have minor weld flaws. Consumers
intends to transfer the spent fuel to a new transportable cask when one is
available.
On October 15, 1999 a planned forty-day refueling and maintenance outage began
at Palisades. Consumers will replace certain nuclear fuel assemblies and 2
low-pressure steam turbines during the outage.
Consumers maintains insurance against property damage, debris removal, personal
injury liability and other risks that are present at its nuclear generating
facilities. Consumers also maintains coverage for replacement power costs during
prolonged accidental outages at Palisades. Insurance would not cover such costs
during the first 12 weeks of any outage, but would cover most of such costs
during the next 52 weeks of the outage, followed by reduced coverage to 80
percent for 110 additional weeks. If certain covered losses occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum assessments of $15 million in any one year to NEIL; $88 million per
occurrence under the nuclear liability secondary financial protection program,
limited to $10 million per occurrence in any year; and $6 million if nuclear
workers claim bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.
The NRC requires Consumers to make certain calculations and report on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock events during its remaining license life, considering
the embrittlement of reactor materials. In December 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor vessel
can be safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. Consumers believes that with fuel management designed
to minimize embrittlement, it can operate Palisades to the end of its license
life in the year 2007 without annealing the reactor vessel. Nevertheless,
Consumers will continue to monitor the matter.
NUCLEAR PLANT DECOMMISSIONING: Consumers collected $51 million in 1998 from its
electric customers for decommissioning of its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. On March 22, 1999,
Consumers received a decommissioning order from the MPSC that approved estimated
decommissioning costs for Big Rock and Palisades of $304 million and $541
million (in 1998 dollars), respectively. Consumers' site-specific
decommissioning cost estimates for Big Rock and Palisades assume that each plant
site will eventually be restored to conform to the adjacent landscape, and all
contaminated equipment will be disassembled and disposed of in a licensed burial
facility. The MPSC order also reduced annual decommissioning surcharges by $4
million a year and required Consumers to file revised decommissioning surcharges
for Palisades that incorporate a gradual reduction in the decommissioning
trust's equity
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investments following the plant's retirement. On April 21, 1999, Consumers filed
with the MPSC a revised decommissioning surcharge for Palisades and anticipates
a revised MPSC order in early 2000. If approved, the annual decommissioning
surcharges for Palisades would be reduced by an additional $4 million a year.
Settlement discussions are underway which could further reduce the annual
recovery. After retirement of Palisades, Consumers plans to maintain the
facility in protective storage if radioactive waste disposal facilities are not
available. Consumers will incur most of the Palisades decommissioning costs
after the plant's NRC operating license expires. When the Palisades' NRC license
expires in 2007, the trust funds are currently estimated to have accumulated
$677 million, assuming current surcharge levels. Consumers estimates that at the
time Palisades is fully decommissioned in the year 2046, the trust funds will
have provided $1.9 billion, including trust earnings, over this decommissioning
period. As of September 30, 1999, Consumers had an investment in nuclear
decommissioning trust funds of $392 million for Palisades and $180 million for
Big Rock.
Big Rock was closed permanently in 1997 because management determined that it
would be uneconomical to operate in an increasingly competitive environment. The
plant was originally scheduled to close on May 31, 2000, at the end of the
plant's operating license. The MPSC has allowed Consumers to continue collecting
decommissioning surcharges through December 31, 2000. Plant decommissioning
began in 1997 and it may take five to ten years to return the site to its
original condition. For the first nine months of 1999, Consumers spent $37
million for the decommissioning and withdrew $29 million from the Big Rock
nuclear decommissioning trust fund. In total, Consumers has spent $112 million
for the decommissioning and withdrew $103 million from the Big Rock nuclear
decommissioning trust fund. These activities had no impact on net income.
CONSUMERS GAS GROUP CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites, including some 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. Consumers has completed
initial investigations at the 23 sites. On sites where Consumers has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Consumers has estimated its costs related to further investigation
and remedial action for all 23 sites using the Gas Research Institute-
Manufactured Gas Plant Probabilistic Cost Model. Using this model the costs are
estimated to be between $66 million and $118 million. These estimates are based
on undiscounted 1999 costs. Using the low end of the range, Consumers estimates
its remaining expenditures at $63 million as of September 30, 1999 and has
accrued a liability for the same amount and also established a corresponding
regulatory asset. Any significant change in assumptions, such as remediation
techniques, nature and extent of contamination, and legal and regulatory
requirements, could affect the estimate of remedial action costs for the sites.
Consumers defers and amortizes over a period of ten years, environmental
clean-up costs above the amount currently being recovered in rates. Rate
recognition of amortization expense will not begin until after a prudence review
in a general rate case. Consumers is allowed current recovery of $1 million
annually. Consumers has initiated lawsuits against certain insurance companies
regarding coverage for some or all of the costs that it may incur for these
sites.
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CONSUMERS GAS GROUP MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement an experimental gas transportation program, which will extend over a
three-year period, and allow up to 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas commodity supplier.
The program is voluntary and participating natural gas customers are selected on
a first-come, first-served basis, up to a limit of 100,000 per year. As of
September 30, 1999, more than 181,000 customers chose alternative gas suppliers,
representing approximately 42 bcf of gas load. The program allows Consumers to
earn a margin on the gas commodity provided it can continue to purchase gas at
prices below the $2.84/mcf cost allowed in its rate. Customers choosing to
remain as sales customers of Consumers will not see a rate change in their
natural gas rates. This three-year program: 1) suspends Consumers' GCR clause,
effective April 1, 1998, establishing a gas commodity cost at a fixed rate of
$2.84 per mcf, allowing Consumers the opportunity to benefit by reducing its
cost of the commodity; 2) establishes an earnings sharing mechanism with
customers if Consumers' earnings exceed certain pre-determined levels; and 3)
establishes a gas transportation code of conduct that addresses the relationship
between Consumers and marketers, including its affiliated marketers. In January
1998, the Attorney General, ABATE and other parties filed claims of appeal
regarding the program with the Court of Appeals.
Consumers uses gas purchase contracts to limit its risk associated with
increases in its gas price above the $2.84 per mcf during the three-year
experimental gas program. It is management's intent to take physical delivery of
the commodity and failure could result in a significant penalty for
nonperformance. At September 30, 1999, Consumers had an exposure to gas price
increases if the ultimate cost of gas was to exceed $2.84 per mcf for the
following volumes: 3 percent of its 1999 requirements; 55 percent of its 2000
requirements; and 55 percent of its first quarter 2001 requirements. Additional
contract coverage is currently under review. The gas purchase contracts
currently in place were consummated at an average price of less than $2.84 per
mcf. The gas purchase contracts are being used to protect against gas price
increases in the three-year experimental gas program where Consumers is
recovering from its customers $2.84 per mcf for gas.
PANHANDLE REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. Hearings were completed in October 1997 and initial decisions
by a FERC ALJ were issued on certain matters in May 1998 and on the remainder of
the rate proceedings in November 1998. Responses to the initial decisions were
provided by Trunkline to FERC following the issuance of the initial decisions.
In May 1999, FERC issued an order remanding certain matters back to the ALJ for
further proceedings. On September 16, 1999, Trunkline filed with FERC a
settlement agreement which would resolve certain issues in this proceeding and
would require Trunkline to refund approximately $2 million. The ALJ has
certified the settlement; it is currently pending review by FERC.
In conjunction with a FERC order issued in September 1997, certain natural gas
producers were required to refund previously collected Kansas ad-valorem taxes
to interstate natural gas pipelines. These pipelines were ordered to refund
these amounts to their customers. All payments are to be made in compliance with
prescribed FERC requirements. At September 30, 1999 and December 31, 1998,
accounts receivable included $53 million and $50 million, respectively, due from
natural gas producers, and other current liabilities included $53 million and
$50 million, respectively, for related obligations.
In June 1998, Trunkline filed a petition with the FERC to abandon 720 miles of
its 26-inch diameter pipeline that
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extends from Longville, Louisiana to Bourbon, Illinois. Trunkline requested
permission to transfer the pipeline to an affiliate, which had entered into an
option agreement with Aux Sable for potential conversion of the line to allow
transportation of hydrocarbon vapors. Trunkline requested FERC to grant the
abandonment authorization in time to separate the pipeline from existing
facilities and allow Aux Sable to convert the pipeline to hydrocarbon vapor
service by October 1, 2000, if the option was exercised. The option expired on
July 1, 1999 and was not renewed by Aux Sable. On November 8, 1999, the FERC
issued a letter order dismissing Trunkline's filing without prejudice to
refiling the abandonment to reflect changed circumstances. Trunkline continues
to evaluate alternatives regarding the 26-inch pipeline.
On May 19, 1999, Trunkline and Trunkline LNG submitted a compliance filing
advising the FERC that the acquisition by CMS Energy of Trunkline LNG triggered
certain provisions of a 1992 settlement. The settlement resolved issues related
to minimum bill provisions of the Trunkline LNG Rate Schedule PLNG-1, as well as
pending rate matters for Trunkline and refund matters for Trunkline LNG.
Specifically, the settlement provisions require Trunkline LNG, and Trunkline in
turn, to make refunds to customers, including Panhandle Eastern Pipe Line
Company and Consumers, who were parties to the settlement, if the ownership of
all or portion of the LNG terminal is transferred to an unaffiliated entity.
Therefore, the total refund due customers of approximately $17 million will be
paid within 30 days of final FERC approval of the compliance filing. In
conjunction with the acquisition of Panhandle by CMS Energy, Duke Energy
indemnified Panhandle for this refund obligation. In conjunction with the
settlement, Panhandle Eastern Pipe Line Company and its customers entered into
an agreement, whereby upon FERC approval of the compliance filing described
above, Panhandle Eastern Pipe Line Company will file to flow through its portion
of the settlement amounts to its customers. The May 19, 1999 compliance filing
is pending FERC approval.
OTHER UNCERTAINTIES
CMS GENERATION ENVIRONMENTAL MATTERS: CMS Generation does not currently expect
to incur significant capital costs at its power facilities to comply with
current environmental regulatory standards.
CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $3.895
billion for 1999, which includes approximately $2.2 billion for the acquisition
of Panhandle, $1.725 billion for 2000, and $1.515 billion for 2001. For further
information, see Capital Resources and Liquidity-Capital Expenditures in the
MD&A.
OTHER: As of September 30, 1999, CMS Energy and Enterprises have guaranteed up
to $447 million in contingent obligations of unconsolidated affiliates and
related parties.
In addition to the matters disclosed in this note, Consumers and certain other
subsidiaries of CMS Energy are parties to certain lawsuits and administrative
proceedings before various courts and governmental agencies arising from the
ordinary course of business. These lawsuits and proceedings may involve personal
injury, property damage, contractual matters, environmental issues, federal and
state taxes, rates, licensing and other matters.
CMS Energy has accrued estimated losses for certain contingencies discussed in
this Note. Resolution of these contingencies is not expected to have a material
adverse impact on CMS Energy's financial position, liquidity, or results of
operations.
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3: SHORT-TERM AND LONG-TERM FINANCINGS, AND CAPITALIZATION
CMS ENERGY: CMS Energy's Senior Credit Facilities consist of a $600 million
three-year revolving credit facility and a five-year $125 million term loan
facility. Additionally, CMS Energy has unsecured lines of credit and letters of
credit in an aggregate amount of $379 million. At September 30, 1999, the total
amount utilized under the Senior Credit Facilities was $592 million, including
$41 million of contingent obligations, and under the unsecured lines of credit
and letters of credit was $216 million.
In January 1999, CMS Energy received net proceeds of approximately $473 million
from the sale of $480 million of senior notes. In February 1999, CMS Energy
received net proceeds of approximately $296 million from the sale of $300
million of senior notes. Proceeds from these offerings were used to repay debt
and for general corporate purposes.
CMS Energy had utilized $600 million of a bridge loan facility to partially fund
the acquisition of Panhandle. As of September 30, 1999, this entire bridge loan
facility had been repaid.
At September 30, 1999, CMS Energy had $114 million of Series A GTNs, $112
million of Series B GTNs, $150 million of Series C GTNs, $199 million of Series
D GTNs, and $215 million of Series E GTNs issued and outstanding with weighted
average interest rates of 7.9 percent, 8.0 percent, 7.7 percent, 7.0 percent,
and 7.2 percent, respectively.
In June 1999, a Delaware statutory business trust established by CMS Energy
privately sold $250 million of Trust Preferred Securities to an entity organized
by Banc of America Securities LLC. The Trust Preferred Securities pay quarterly
distributions at a floating rate. Net proceeds of approximately $244 million
were used to pay down a portion of the bridge loan obtained for the acquisition
of Panhandle. In exchange for these proceeds, CMS Energy sold subordinated notes
to the trust. In connection with this financing, CMS Energy also agreed to sell
$250 million of CMS Energy Common Stock at prevailing market prices through Banc
of America Securities LLC within twenty-four months.
In June 1999, CMS Energy sold $250 million of senior notes, 8 percent Reset Put
Securities, due July 1, 2011 and $150 million of senior notes, 8.375 percent
Reset Put Securities, due July 1, 2013. The $250 million senior notes and the
$150 million senior notes are subject to a call option and mandatory put on July
1, 2001 and July 1, 2003, respectively. The call option allows the callholder to
purchase the notes, at which point the coupon rate will be reset for the
remaining term of the notes. If the call option is not exercised by the
callholder, the notes will be mandatorily put to CMS Energy at a price equal to
100 percent of the principal amount. Net proceeds of approximately $404 million,
which includes approximately $9 million for the sale of the call options, were
also used to pay down the remaining portion of the bridge loan obtained for the
acquisition of Panhandle.
In July 1999, 7.25 million units of 8.75 percent Adjustable Convertible Trust
Securities were sold by CMS Energy and CMS Energy Trust II, a Delaware statutory
business trust established by CMS Energy. Each security consists of a Trust
Preferred Security of CMS Energy Trust II maturing in five years and a contract
for the purchase of CMS Energy Common Stock in three years at a conversion
premium up to 28 percent or an effective price of $53 per common share. Net
proceeds from the sale totaled $291 million and were used to repay portions of
various lines of credit and the revolving credit facility.
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CONSUMERS: At September 30, 1999, Consumers had FERC authorization to issue or
guarantee, through June 2000, up to $900 million of short-term securities
outstanding at any one time and to guarantee, through 1999, up to $25 million in
loans made by others to residents of Michigan for making energy-related home
improvements. Consumers also had remaining FERC authorization to issue, through
June 2000, up to $275 million and $390 million of long-term securities with
maturities up to 30 years for refinancing purposes and for general corporate
purposes, respectively.
Consumers has an unsecured $300 million credit facility and unsecured lines of
credit aggregating $135 million. These facilities are available to finance
seasonal working capital requirements and to pay for capital expenditures
between long-term financings. At September 30, 1999, a total of $317 million was
outstanding at a weighted average interest rate of 6.1 percent, compared with
$302 million outstanding at September 30, 1998, at a weighted average interest
rate of 6.3 percent. In January 1999, Consumers renegotiated a variable-to-fixed
interest rate swap totaling $175 million. In September 1999, Consumers entered
into two variable-to-fixed interest rate swaps totaling $740 million.
Consumers also has in place a $325 million trade receivables sale program. At
September 30, 1999 and 1998, receivables sold under the program totaled $314
million and $307 million, respectively. Accounts receivable and accrued revenue
in the Consolidated Balance Sheets have been reduced to reflect receivables
sold.
Consumers issued long-term bank debt of $15 million in February 1999, maturing
in February 2002, at an initial interest rate of 5.3 percent. Proceeds from this
issuance were used for general corporate purposes.
On April 1, 1999, Consumers redeemed all eight million outstanding shares of its
$2.08 preferred stock at $25.00 per share for a total of $200 million.
Subsequent to quarter end, 7 million shares of 9.25 percent Trust Preferred
Securities were issued and sold through Consumers Energy Company Financing III,
a wholly owned business trust consolidated with Consumers. Net proceeds from the
sale totaled approximately $170 million. Consumers formed the trust for the sole
purpose of issuing the Trust Preferred Securities. Consumers' obligations with
respect to the Trust Preferred Securities under the related tax-deductible
notes, under the indenture through which Consumers issued the notes, under
Consumers' guarantee of the Trust Preferred Securities, and under the
declaration by the trust, taken together, constitute a full and unconditional
guarantee by Consumers of the trust's obligations under the Trust Preferred
Securities.
Under the provisions of its Articles of Incorporation, Consumers had $318
million of unrestricted retained earnings available to pay common dividends at
September 30, 1999. In May 1999, Consumers declared and paid a $76 million
common dividend. In July 1999, Consumers declared a $35 million common dividend
which was paid in August 1999. In September 1999, Consumers declared a $55
million common dividend payable in November 1999.
PANHANDLE: In March 1999, CMS Energy, through its subsidiary CMS Panhandle
Holding, received net proceeds of approximately $789 million from the sale of
$800 million of senior notes issued by CMS Panhandle Holding. Proceeds from this
offering were used to initially fund the acquisition of Panhandle. On June 15,
1999 CMS Panhandle Holding merged into Panhandle, at which point the notes
became direct obligations of Panhandle. In September 1999, Panhandle exchanged
the $800 million of notes originally issued by CMS Panhandle Holding with
substantially identical SEC-registered notes.
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CMS OIL AND GAS: In May 1999, CMS Oil and Gas executed a $225 million credit
facility. Borrowings under the credit facility are revolving credit loans for
three years, ending in May 2002. The credit facility provides various options to
CMS Oil and Gas relative to interest rates and also requires a facility fee.
4: EARNINGS PER SHARE AND DIVIDENDS
Earnings per share attributable to Common Stock for the three, nine and twelve
months ended September 30, 1999 reflect the performance of the Consumers Gas
Group. The allocation of earnings attributable to each class of Common Stock and
the related amounts per share are computed by considering the weighted average
number of shares outstanding.
Earnings attributable to the Outstanding Shares are equal to Consumers Gas Group
net income multiplied by a fraction; the numerator is the weighted average
number of Outstanding Shares during the period and the denominator is the
weighted average number of Outstanding Shares and authorized but unissued shares
of Class G Common Stock not held by holders of the Outstanding Shares during the
period. The earnings attributable to Class G Common Stock on a per share basis
for the three months ended September 30, 1999 and 1998 are based on 26.06
percent and 25.38 percent, respectively, of the income of Consumers Gas Group.
In October 1999, all of the issued and outstanding shares of Class G Common
Stock were exchanged for shares of CMS Energy Common Stock (see Note 7).
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COMPUTATION OF EARNINGS PER SHARE:
In Millions, Except Per Share Amounts
- ---------------------------------------------------------------------------------------------------------
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30 September 30 September 30
1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
(a) (a)
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income
$ 83 $ 81 $256 $ 234 $307 $293
=====================================================
Net Income Attributable to Common Stocks:
CMS Energy - Basic EPS $ 86 $ 83 $248 $ 226 $294 $279
Add conversion of 7.75% Trust
Preferred Securities (net of tax) 2 2 6 6 9 9
-----------------------------------------------------
CMS Energy - Diluted EPS $ 88 $ 85 $254 $ 232 $303 $288
=====================================================
Class G:
Basic and Diluted EPS $ (3) $ (2) $ 8 $ 8 $ 13 $ 14
=====================================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares - Basic 109 102 109 101 108 101
Add conversion of 7.75% Trust
Preferred Securities 4 4 4 4 4 4
Options-Treasury Shares 1 1 1 1 1 1
-----------------------------------------------------
Average Shares - Diluted 114 107 114 106 113 106
=====================================================
Class G:
Average Shares
Basic and Diluted 9 8 9 8 9 8
=====================================================
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy:
Basic $ .79 $ .81 $2.29 $2.23 $2.73 $2.77
Diluted $ .78 $ .80 $2.25 $2.19 $2.70 $2.73
Class G:
Basic and Diluted $ (.38) $ (.16) $ .90 $1.04 $1.41 $1.73
=========================================================================================================
(a) Includes the cumulative effect of an accounting change in the first
quarter of 1998 which increased net income attributable to CMS Energy
Common Stock $43 million ($.40 per share - basic and diluted) and Class G
Common Stock $12 million ($.36 per share - basic and diluted).
In February and May 1999, CMS Energy paid dividends of $.33 per share on CMS
Energy Common Stock and $.325 per share on Class G Common Stock. In August 1999,
CMS Energy paid dividends of $.365 per share on CMS Energy Common Stock and $.34
per share on Class G Common Stock. In September
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1999, the Board of Directors declared a quarterly dividend of $.365 per share on
CMS Energy Common Stock, payable in November 1999. As a result of the exchange
of Class G Common Stock for CMS Energy Common Stock, no Class G Common Stock
dividend was declared in September. Class G Common Stock shareholders prior to
the exchange will receive the CMS Energy Common Stock dividend that is payable
in November 1999.
5: RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS
CMS Energy and its subsidiaries use a variety of derivative instruments
(derivatives), including futures contracts, swaps, options and forward
contracts, to manage exposure to fluctuations in commodity prices, interest
rates and foreign exchange rates. To qualify for hedge accounting, derivatives
must meet the following criteria: i) the item to be hedged exposes the
enterprise to price, interest or exchange rate risk; and ii) the derivative
reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counter parties, including
financial institutions and energy marketers, fail to perform under the
agreements. CMS Energy minimizes such risk by performing financial credit
reviews using, among other things, publicly available credit ratings of such
counter parties. Nonperformance by counter parties is not expected to have a
material adverse impact on CMS Energy's financial position, liquidity, or
results of operations.
COMMODITY PRICE HEDGES: CMS Energy engages in both energy trading and
non-trading activities as defined by EITF 98-10, Accounting for Energy Trading
and Risk Management Activities. CMS Energy accounts for its non-trading
commodity price derivatives as hedges and, as such, defers any changes in market
value and gains and losses resulting from settlements until the hedged
transaction is complete. If there was a loss of correlation between the changes
in the market value of the commodity price contracts and the market price
ultimately received for the hedged item, and the impact was material, the open
commodity price contracts would be marked-to-market and gains and losses would
be recognized in the income statement currently. Effective January 1, 1999, CMS
Energy adopted mark-to-market accounting for energy trading contracts in
accordance with EITF 98-10. Mark-to-market accounting requires gains and losses
resulting from changes in market prices on contracts entered into for trading
purposes to be reflected in earnings currently. The after-tax mark-to-market
adjustment resulting from the adoption of EITF 98-10 had an immaterial effect on
CMS Energy's financial position, results of operations and cash flows as of
September 30, 1999.
Consumers enters into electric option contracts to ensure a reliable source of
capacity to meet its customers' electricity requirements and to limit its risk
associated with electricity price increases. It is management's intent to take
physical delivery of the commodity. Consumers continuously evaluates its daily
capacity needs and sells the option contracts, if marketable, when it has excess
daily capacity. Consumers' maximum exposure associated with these options is
limited to premiums paid.
CMS Oil and Gas has one arrangement which is used to fix the prices that CMS Oil
and Gas will pay for gas supplied to the MCV Facility for the years 2001 through
2006 by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed
price, escalating at 8 percent per year thereafter, starting at $2.82 per MMBtu
in 2001. The settlement periods are each a one-year period ending December 31,
2001 through 2006 on 3.65 million MMBtu. If the floating price, essentially the
then-current Gulf Coast spot price, for a period is higher than the fixed price,
the seller pays CMS Oil and Gas the difference, and vice versa.
CMS-41
47
The contract with the seller provides a calculation of exposure for the purpose
of requiring an exposed party to post a standby letter of credit. Under this
calculation, if a party's exposure at any time exceeds $5 million, that party is
required to obtain a letter of credit in favor of the other party for the excess
over $5 million and up to $10 million. At September 30, 1999, the fair value of
this contract reflected payment due to CMS Oil and Gas of $3 million. As of
September 30, 1999, the fair value of this contract is $17 million.
A subsidiary of CMS Gas Transmission uses natural gas futures contracts and CMS
Marketing, Services and Trading Company uses natural gas and oil futures
contracts, options and swaps (which require a net cash payment for the
difference between a fixed and variable price).
INTEREST RATE HEDGES: CMS Energy and some of its subsidiaries enter into
interest rate swap agreements to exchange variable rate interest payment
obligations to fixed rate obligations without exchanging the underlying notional
amounts. These agreements convert variable rate debt to fixed rate debt to
reduce the impact of interest rate fluctuations. The notional amounts parallel
the underlying debt levels and are used to measure interest to be paid or
received and do not represent the exposure to credit loss. The notional amount
of CMS Energy's and its subsidiaries' interest rate swaps was $3.1 billion at
September 30, 1999. The difference between the amounts paid and received under
the swaps is accrued and recorded as an adjustment to interest expense over the
life of the hedged agreement.
FOREIGN EXCHANGE HEDGES: CMS Energy uses forward exchange contracts and collared
options to hedge certain receivables, payables, long-term debt and equity value
relating to foreign investments. The purpose of CMS Energy's foreign currency
hedging activities is to protect the company from the risk that U.S. dollar net
cash flows resulting from sales to foreign customers and purchases from foreign
suppliers and the repayment of non-U.S. dollar borrowings as well as equity
reported on the company's balance sheet, may be adversely affected by changes in
exchange rates. These contracts do not subject CMS Energy to risk from exchange
rate movements because gains and losses on such contracts offset losses and
gains, respectively, on assets and liabilities being hedged. The notional amount
of the outstanding foreign exchange contracts was $1.7 billion at September 30,
1999, which includes $330 million, $350 million and $880 million for Australian,
Brazilian and Argentine foreign exchange contracts, respectively. The estimated
fair value of the foreign exchange and option contracts at September 30, 1999
was $24 million, representing the amount CMS Energy would pay upon settlement.
6: REPORTABLE SEGMENTS
CMS Energy operates principally in the following six reportable segments:
electric utility; gas utility; independent power production; oil and gas
exploration and production; natural gas transmission, storage and processing;
and energy marketing, services and trading.
The electric utility segment consists of regulated activities associated with
the generation, transmission and distribution of electricity in the State of
Michigan. The gas utility segment consists of regulated activities associated
with the production, transportation, storage and distribution of natural gas in
the State of Michigan. The other reportable segments consist of the development
and management of electric, gas and other energy-related projects in the United
States and internationally, including energy trading and marketing. CMS Energy's
reportable segments are strategic business units organized and managed by
CMS-42
48
the nature of the products and services each provides. The accounting policies
of each reportable segment are the same as those described in the summary of
significant accounting policies. CMS Energy's management evaluates performance
based on pretax operating income. Intersegment sales and transfers are accounted
for at current market prices and are eliminated in consolidated pretax operating
income by segment.
The Consolidated Statements of Income show operating revenue and pretax
operating income by reportable segment. Revenues from an international energy
distribution business and a land development business fall below the
quantitative thresholds for reporting. Neither of these segments has ever met
any of the quantitative thresholds for determining reportable segments. Amounts
shown for the natural gas transmission, storage and processing segment include
Panhandle, which was acquired in March 1999. Other financial data for reportable
segments are as follows:
Reportable Segments
In Millions
- -----------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------
Identifiable Assets
Electric utility (a) $ 4,540 $ 4,640
Gas utility (a) 1,760 1,726
Independent power production 2,688 2,252
Oil and gas exploration and production 590 547
Natural gas transmission, storage and processing 3,512 971
Marketing, services and trading 227 152
Other 1,277 1,022
-----------------------------------------------------------------
$14,594 $11,310
=====================================================================================================
(a) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.
CMS-43
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7: EXCHANGE OF CLASS G COMMON STOCK
On October 25, 1999, CMS Energy exchanged approximately 6.1 million shares of
CMS Energy Common Stock for all of the approximately 8.7 million issued and
outstanding shares of Class G Common Stock in a tax-free exchange for United
States federal income tax purposes. The exchange ratio of .7041 share of CMS
Energy Common Stock for each share of Class G Common Stock represents the fair
market value of CMS Energy Common Stock equal to 115 percent of the fair market
value of one share of Class G Common Stock. Fair market values of CMS Energy
Common Stock and Class G Common Stock were determined by calculating the average
of the daily closing prices on the New York Stock Exchange from July 28, 1999 to
August 24, 1999. Unaudited pro forma earnings per share of CMS Energy for the
three, nine and twelve months ended September 30, 1999 and 1998, as if the
exchange had occurred as of the beginning of each respective period, are as
follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
Basic earnings per share $ .72 $ .76 $2.23 $2.19 $2.69 $2.75
Diluted earnings per share $ .71 $ .74 $2.20 $2.15 $2.66 $2.72
CMS-44
50
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of CMS ENERGY
CORPORATION (a Michigan corporation) and subsidiaries as of September 30, 1999
and 1998, the related consolidated statements of income and common stockholders'
equity for the three-month, nine-month, and twelve-month periods then ended, and
the related consolidated statements of cash flows for the nine-month and
twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statement of
preferred stock of CMS Energy Corporation and subsidiaries as of December 31,
1999, and the related consolidated statements of income, common stockholders'
equity and cash flows for the year then ended (not presented herein), and, in
our report dated January 26, 1999 (except with respect to the matters disclosed
in Note 3, "Consumers' Electric Utility Rate Matters", and Note 19, as to which
the date is March 29, 1999), we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1998, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Detroit, Michigan,
November 10, 1999.
CMS-45
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CMS-46
52
CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consumers is a combination electric and gas utility company serving the Lower
Peninsula of Michigan and is a subsidiary of CMS Energy, a holding company.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the automotive
industry.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
Consumers' 1998 Form 10-K. This MD&A also refers to, and in some sections
specifically incorporates by reference, Consumers' Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Statements and Notes.
This report contains forward-looking statements, as defined by the Private
Securities Litigation Reform Act of 1995. While forward-looking statements are
based upon assumptions and such assumptions are believed to be reasonable and
are made in good faith, Consumers cautions that assumed results almost always
vary from actual results and the difference between assumed and actual results
can be material. The type of assumptions that could materially affect the actual
results are discussed in the Forward-Looking Statements section in this MD&A.
More specific risk factors are contained in various public filings made by
Consumers with the SEC. This report also describes material contingencies in
Consumers' Condensed Notes to Consolidated Financial Statements and the readers
are encouraged to read such Notes.
RESULTS OF OPERATIONS
CONSUMERS CONSOLIDATED EARNINGS
In Millions
- -------------------------------------------------------------------------------------------------------------------
September 30 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------
Three months ended $ 88 $ 77 $ 11
Nine months ended 265 239 26
Twelve months ended 338 311 27
===================================================================================================================
Net income available to the common stockholder was $88 million for the three
months ended September 30, 1999 compared to $77 million for the same 1998
period. The $11 million earnings increase was primarily due to increased
electric deliveries and lower operating costs including reduced power supply
costs and related revenue recovery. This increase was partially offset by a
regulatory disallowance of certain gas costs totaling $8 million for the 1997
and 1998 years. Net income for the nine months ended September 30, 1999 was $265
million compared to $239 million for the same period in 1998. The $26 million
earnings increase was due to increased electric deliveries, higher gas
deliveries as a result of colder temperatures during the heating season
compared to 1998, and changes in regulation which allow Consumers to benefit
from reduced electric and gas costs. These increases were partially offset by
the regulatory disallowance for the 1997 and 1998 years discussed above and
the absence of an accounting change for property taxes, which occurred in 1998.
The accounting change in 1998 resulted in a benefit of $66 million ($43 million
after-tax) that was partially offset by the recognition of a $37 million dollar
loss ($24 million after tax) for the underrecovery of power costs under the PPA.
Net income for the twelve months ended September 30, 1999 was $338
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million compared to $311 million for the same period in 1998. The $27 million
earnings increase was due to higher electric and gas deliveries and from lower
electric power costs and reduced gas costs. Partially offsetting these benefits
were additional operating expenses, the regulatory disallowance for the 1997 and
1998 years, the absence of the 1998 change in accounting for property taxes and
the loss from the PPA as discussed above. For further information, see the
Electric and Gas Utility Results of Operations sections and Note 2,
Uncertainties.
ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
In Millions
- -------------------------------------------------------------------------------------------------------------------
September 30 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------
Three months ended $ 168 $ 153 $ 15
Nine months ended 425 378 47
Twelve months ended 522 468 54
===================================================================================================================
Electric pretax operating income was $168 million for the three months ended
September 30, 1999 compared to $153 million for the same period in 1998. The $15
million earnings increase was the result of higher electric deliveries and lower
operating costs including reduced power supply costs and related revenue
recovery. Electric pretax operating income was $425 million for the nine months
ended September 30, 1999 compared to $378 million for the same period in 1998.
The $47 million earnings increase was again due to higher electric deliveries
and lower operating costs including reduced power supply costs. This earnings
increase was partially offset by reduced non-commodity revenues, and by higher
depreciation costs for new property and equipment. Electric pretax operating
income was $522 million for the twelve months ended September 30, 1999 compared
to $468 million for the same period in 1998. The $54 million earnings increase
was primarily due to higher electric deliveries and changes in regulation, which
after 1997 provided Consumers the opportunity to benefit from reduced power
supply costs. The following table quantifies these impacts on Pretax Operating
Income:
In Millions
- -------------------------------------------------------------------------------------------------------------------
Three Months Nine Months Twelve Months
Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
- -------------------------------------------------------------------------------------------------------------------
Electric deliveries $ 6 $ 32 $ 25
Power supply costs and related revenue recovery 6 24 41
Other non-commodity revenue (5) (10) (11)
Operations and maintenance 9 6 3
General taxes and depreciation (1) (5) (4)
----------------------------------------------
Total change $ 15 $ 47 $ 54
==================================================================================================================
ELECTRIC DELIVERIES: Total electric deliveries for the three months, nine months
and twelve months ended September 30, 1999, increased in all customer classes
due primarily to sales growth. Electric deliveries were 10.9 billion kWh for the
three months ended September 30, 1999, an increase of 1.7 percent. Electric
deliveries were 31.3 billion kWh for the nine months ended September 30, 1999,
an
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increase of 3.8 percent. Electric deliveries were 41.2 billion kWh for the
twelve months ended September 30, 1999, an increase of 2.5 percent.
POWER COSTS:
In Millions
- -------------------------------------------------------------------------------------------------------------------
September 30 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------
Three months ended $ 335 $ 315 $ 20
Nine months ended 906 899 7
Twelve months ended 1,182 1,190 (8)
====================================================================================================================
Power costs increased for the three and nine month periods ended September 30,
1999 compared to the same 1998 period as a result of higher sales. Power costs
decreased for the twelve month period ended September 30, 1999 compared to the
same 1998 period due to lower purchased power costs which more than offset the
increased power cost as a result of higher sales.
UNCERTAINTIES: Several trends or uncertainties may affect Consumers' financial
condition. These trends or uncertainties have, or Consumers reasonably expects
could have, a material impact on net sales, revenues, or income from continuing
electric operations. Such uncertainties include: 1) capital expenditures for
compliance with the Clean Air Act; 2) environmental liabilities arising from
compliance with various federal, state and local environmental laws and
regulations, including potential liability or expenses relating to the Michigan
Natural Resources and Environmental Protection Act and Superfund; 3) cost
recovery relating to the MCV Partnership; 4) electric industry restructuring; 5)
implementation of a frozen PSCR and initiatives to be undertaken to reduce
exposure to high energy prices; 6) nuclear decommissioning issues and ongoing
issues relating to the storage of spent fuel and the operating life of
Palisades. For detailed information about these trends or uncertainties, see
Note 2, Uncertainties, incorporated by reference herein.
GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
In Millions
- -------------------------------------------------------------------------------------------------------------------
September 30 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------
Three months ended $ (6) $ 6 $ (12)
Nine months ended 87 81 6
Twelve months ended 132 134 (2)
====================================================================================================================
Gas pretax operating income resulted in a loss of $6 million for the three
months ended September 30, 1999 compared to income of $6 million for the same
period in 1998. The decrease of $12 million was primarily the result of a
regulatory disallowance of $7 million and increased operating costs. For the
nine months ended September 30, 1999, gas pretax operating income was $87
million compared to $81 million for the same period in 1998. The increase of $6
million was the result of increased gas deliveries due to colder temperatures
during the 1999 heating season and a regulatory change, which suspended
Consumers' GCR clause in April 1998. This suspension provided Consumers the
opportunity to benefit from lower gas prices. In the past, reductions or
increases in gas costs would have had no impact on gas pretax operating income
because any changes in gas costs were passed on to
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Consumers' gas customers. These increases were partially offset again by the
regulatory disallowance, as discussed above, higher operation and maintenance
costs, and higher depreciation due to new property and equipment. Gas pretax
operating income was $132 million for the twelve month period ended September
30, 1999 compared to $134 million for the same period in 1998. This decrease
reflects higher depreciation costs and general tax expense associated with new
property and equipment partially offset by higher gas deliveries and lower gas
costs. The following table quantifies these impacts on Pretax Operating Income:
In Millions
- -------------------------------------------------------------------------------------------------------------------
Three Months Nine months Twelve Months
Ended Sept. 30 Ended Sept.30 Ended Sept. 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
- -------------------------------------------------------------------------------------------------------------------
Gas deliveries $ 1 $ 21 $ 8
Gas commodity and related revenue (11) - 10
Gas wholesale and retail services activities - 2 3
Operation and maintenance (4) (8) (1)
General taxes, depreciation and other 2 (9) (22)
----------------------------------------------
Total increase (decrease) in pretax operating income $ (12) $ 6 $ (2)
====================================================================================================================
GAS DELIVERIES: System deliveries for the three month period ended September 30,
1999, including miscellaneous transportation, were 43.6 bcf compared to 42 bcf
for the same 1998 period. This increase of 3.8 percent was primarily due to
weather during the period. System deliveries for the nine months period ended
September 30, 1999, including miscellaneous transportation, were 272.3 bcf
compared to 249.8 bcf for the same 1998 period. This increase of 9.0 percent was
primarily due to colder temperatures during the 1999 heating season. System
deliveries for the twelve month period ended September 30, 1999, including
miscellaneous transportation, were 382.3 bcf compared to 376.7 bcf for the same
1998 period. This increase of 1.5 percent was again primarily the result of
colder temperatures during the 1999 heating season.
COST OF GAS SOLD:
In Millions
- -------------------------------------------------------------------------------------------------------------------
September 30 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------
Three months ended $ 44 $ 39 $ 5
Nine months ended 428 377 51
Twelve months ended 614 600 14
===================================================================================================================
The cost increases for the three month period ended September 30, 1999 resulted
from higher gas cost during this period. The cost increases for the nine month
period and the twelve month period ended September 30, 1999 was the result of
increased sales due to colder overall temperatures during the winter heating
season partially offset by lower gas prices.
UNCERTAINTIES: Consumers' financial position may be affected by a number of
trends or uncertainties that have, or Consumers reasonably expects could have, a
material impact on net sales or revenues or income from continuing gas
operations. Such uncertainties include: 1) potential environmental costs at a
number of sites, including sites formerly housing manufactured gas plant
facilities; 2) a statewide experimental gas restructuring program; and 3)
implementation of a suspended GCR and initiatives
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undertaken to protect against gas price increases. For detailed information
about these uncertainties see Note 2, Uncertainties, incorporated by reference
herein.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers derives cash from operating activities from the
sale and transportation of natural gas and from the generation, transmission and
sale of electricity. Cash from operations totaled $534 million and $452 million
for the first nine months of 1999 and 1998, respectively. The $82 million change
was primarily due to higher electric and gas sales and a $93 million decrease in
accounts receivable partially offset by a $55 million increase in gas and coal
inventories. Consumers primarily uses cash derived from operating activities to
maintain and expand electric and gas systems, to retire portions of long-term
debt, and to pay dividends.
INVESTING ACTIVITIES: Cash used for investing activities totaled $(325) million
and $(235) million for the first nine months of 1999 and 1998, respectively. The
$90 million change was primarily the result of a $33 million increase in capital
expenditures, a $15 million increase in electric restructuring implementation
plan costs and the absence of $27 million proceeds from the 1998 sale of two
non-utility partnerships.
FINANCING ACTIVITIES: Cash used in financing activities totaled $(215) million
and $(196) million for the first nine months of 1999 and 1998, respectively.
This $19 million increase in the use of cash was primarily the result of a $200
million retirement of preferred stock and a $35 million increase in the payment
of common stock dividends. Offsetting this use of cash was a $14 million
increase in net proceeds from debt refinancing and a $200 million contribution
in capital by Consumers' common stockholder.
OTHER INVESTING AND FINANCING MATTERS: On April 1, 1999, Consumers redeemed all
eight million outstanding shares of its $2.08 preferred stock at $25.00 per
share for a total of $200 million. Consumers has credit facilities, lines of
credit and a trade receivable sale program in place as anticipated sources of
funds to fulfill its currently expected capital expenditures. For detailed
information about these sources of funds, see Note 3, Short-Term Financings and
Capitalization, incorporated by reference herein.
OUTLOOK
CAPITAL EXPENDITURES OUTLOOK
Consumers estimates the following capital expenditures, including new lease
commitments, by type and by business segment over the next three years. These
estimates are prepared for planning purposes and are subject to revision.
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In Millions
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1999 2000 2001
- -------------------------------------------------------------------------------------------------------------------
Construction $493 $539 $609
Nuclear fuel lease 11 - 19
Capital leases other than nuclear fuel 21 26 22
-------------------------------------------------
$525 $565 $650
===================================================================================================================
Electric utility operations (a) $400 $435 $520
Gas utility operations (a) 125 130 130
-------------------------------------------------
$525 $565 $650
===================================================================================================================
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and gas
utility businesses.
ELECTRIC BUSINESS OUTLOOK
GROWTH: Consumers expects average annual growth of 2.6 percent per year in
electric system deliveries for the years 2000 to 2004. This growth rate does not
take into account the possible impact of restructuring or changed regulation on
the industry. Abnormal weather, changing economic conditions, or the developing
competitive market for electricity may affect actual electric sales by Consumers
in future periods.
RESTRUCTURING: Competition affects Consumers' retail electric business. To meet
its challenges, Consumers has multi-year contracts with some of its largest
industrial customers to serve certain facilities. The MPSC approved these
contracts as part of its phased introduction to competition. Some of these
contracts have termination and restructuring options available to customers
depending on business and regulatory circumstances that may occur in the future.
FERC Orders 888 and 889, as amended, require utilities to provide direct access
to the interstate transmission grid for wholesale transactions. Consumers and
Detroit Edison disagree on the effect of the orders on the Michigan Electric
Power Coordination Center pool. Consumers proposes to maintain the benefits of
the pool through at least December 2000. Detroit Edison, however, had previously
proposed that the parties terminate the pool agreement immediately. If the pool
agreement is terminated, Consumers could, among other alternatives, join a
regional transmission organization. FERC has indicated this preference for
structuring the operations of the electric transmission grid.
For material changes relating to the restructuring of the electric utility
industry, see Note 1, Corporate Structure and Summary of Significant Accounting
Policies, "Utility Regulation" and Note 2, Uncertainties, "Electric Rate Matters
- - Electric Restructuring", incorporated by reference herein.
RATE MATTERS: In November 1997, ABATE filed a complaint with the MPSC alleging
that Consumers' electric earnings are more than its authorized rate of return
and sought an immediate reduction in Consumers' electric rates. The MPSC staff
investigated the complaint and concluded in an April 1998 report that no formal
rate proceeding was warranted at that time. The MPSC has now scheduled this
matter for further proceedings that should lead to more definitive MPSC
resolution in the first quarter of 2000, absent prior agreement among the
parties. In those proceedings, ABATE and intervenors bear the
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58
burden of convincing the MPSC to reduce electric rates, which will otherwise
remain unchanged. In its testimony filed in this case, ABATE claimed that
Consumers' received approximately $189 million in excess revenues for 1998. In
its testimony MPSC staff stated that 1998 financial results show excess revenues
of $118 million when actual results were compared to the previously authorized
electric return on equity, but recognized that no definitive conclusion could be
reached from such a simplistic computation about the proper level of future
retail electric rates. The MPSC staff presentation anticipated Consumers would
file testimony and exhibits using traditional ratemaking adjustments and
normalizations which would negate ABATE's claim of excessive earnings. Consumers
has filed such testimony showing that after such normalizations, there is a
revenue deficiency of approximately $3 million. The MPSC staff offered several
alternatives for the MPSC to consider. They involved several different refunds
or reductions which the MPSC could consider separately or in combination, but
which, if made would not result in a permanent future reduction in electric
rates in the amount being sought by ABATE. Consumers believes that ABATE has not
met its burden of proving that a reduction in rates is required. Consumers also
believes that ABATE's request for refunds from 1995 to present is inappropriate
and unlawful; no such retroactive rate adjustment has ever been granted by the
MPSC. Consumers is unable to predict the outcome of this matter.
GAS BUSINESS OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries excluding transportation to the MCV Facility and off-system
deliveries, to grow at an average annual rate of between one and two percent
over the next five years based primarily on a steadily growing customer base.
Actual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, particularly as a
result of industry restructuring, and the level of natural gas consumption.
Consumers also offers a variety of energy-related services to its customers
focused upon appliance maintenance, home safety, commodity choice and assistance
to customers purchasing heating, ventilation and air conditioning equipment.
RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a statewide three-year experimental gas transportation program,
eventually allowing 300,000 residential, commercial and industrial retail gas
sales customers to choose their gas supplier. For further information regarding
restructuring of the Gas Business, see Note 2, Uncertainties, "Gas Rate
Matters-Gas Restructuring," incorporated by reference herein.
OTHER MATTERS
YEAR 2000 COMPUTER MODIFICATIONS
Consumers uses software and related technologies throughout its businesses that
the year 2000 date change could affect. If uncorrected, this event could cause
Consumers to, among other things, delay the issuance of bills or reports, issue
inaccurate bills, report inaccurate data, incur generating plant outages, or
create energy delivery uncertainties. In 1995, Consumers established a Year 2000
Program to ensure the continued operation of its businesses at the turn of the
century. Consumers' efforts included dividing the programs requiring
modification between critical and noncritical programs.
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Consumers established a formal methodology to identify critical business
functions and risk scenarios, to correct problems identified, to develop test
plans and expected results, and to test the corrections made. Consumers' Year
2000 Program involves an aggressive, comprehensive four-phase approach,
including impact analysis, remediation, compliance review, and
monitoring/contingency planning.
The impact analysis phase includes the analysis, inventory, prioritization and
remediation plan development for all technology essential to core business
processes. The remediation phase involves testing and implementation of
remediated technology. Consumers established a mainframe test environment in
1997 and established a test environment for network servers and stand-alone
personal computers in mid-1998. Essential corporate business systems have been
tested in these test environments. The compliance review phase includes the
assembling of compliance documentation for each technology component, as
remediation efforts are completed, and additional verification testing of
essential technology where necessary. The monitoring/contingency planning phase
includes compliance monitoring to ensure that nothing reintroduces year 2000
problems into remediated technology. This phase also includes the development of
contingency plans to address reasonably likely risk scenarios.
STATE OF READINESS: Consumers is managing traditional information technology,
which consists of essential business systems (such as payroll, billing and
purchasing) and infrastructure (including mainframe, wide area network, local
area networks, personal computers, radios and telephone systems). Consumers is
also managing process control computers and embedded systems contained in
buildings, equipment and energy supply and delivery systems, in addition to
essential goods and services. Essential goods and services include electric fuel
supply, gas fuel supply, independent electric power supplies, buildings and
other facilities, electronic commerce, telecommunications network carriers,
financial institutions, purchasing vendors, and software and hardware technology
vendors. Consumers is addressing the preparedness and risk of these external
businesses through readiness assessment questionnaires.
The following table shows the status of Consumers' Year 2000 Program by phase,
with target dates for completion and percentage complete based upon software and
hardware inventory counts as of September 30, 1999:
Monitoring/
Impact Compliance Contingency
Analysis Remediation Review Planning
- ---------------------------------------------------------------------------------------------------------
Systems (a) (b) (a) (b) (a) (b) (a) (b)
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ----
Electric 3/98 100% 6/99 100% 6/99 100% 6/99 100%
Gas 3/98 100% 6/99 100% 6/99 100% 6/99 100%
Corporate 3/98 100% 9/99 100% 9/99 100% 6/99 100%
Operating Services 3/98 100% 6/99 100% 9/99 100% 6/99 100%
Information Technology 3/98 100% 9/99 100% 9/99 100% 6/99 100%
Essential Goods
& Services 7/99 100% N/A N/A (c)
(a) Target date for completion.
(b) Current percentage complete.
(c) Contingency planning for essential goods and services is incorporated into
contingency planning for each major system presented.
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COST OF REMEDIATION: Consumers expenses the cost of software modifications as
incurred, and capitalizes and amortizes the cost of new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is $22
million. Costs incurred through September 30, 1999 were $20 million. Consumers'
annual Year 2000 Program costs represent approximately 1% to 10% of a typical
Consumers' annual information technology budget. Consumers funds Year 2000
compliance work primarily from operations. To date, the commitment of Consumers
resources to the year 2000 issue has not deferred any information technology
projects that could have a material adverse effect on Consumers' financial
position, liquidity or results of operations.
RISK ASSESSMENT: Consumers considers the most reasonably likely worst-case
scenarios to be: (1) a lack of communications to dispatch crews to electric or
gas emergencies; (2) a lack of communications to generating units to balance
electrical load; and (3) power shortages due to the lack of stability of the
regional or national electric grid. These scenarios could result in Consumers
not being able to generate or distribute enough energy to meet customer demand
for a period of time. This type of outcome could result in lost sales and
profits and legal liability. Year 2000 remediation and testing efforts are
concentrating on these risk areas and will continue through the end of 1999.
Contingency plans are in place and will be executed, if necessary, to mitigate
the risks associated with these scenarios further.
CONTINGENCY PLANS: Contingency plans are in place for all systems and providers
of essential goods and services and for reasonably likely worst-case scenarios
related to year 2000 issues. In many cases, Consumers has arrangements with
multiple vendors of similar goods and services in anticipation that if one
cannot meet its commitments, others may be able to. Contingency plans provided
for manual dispatching of crews and manual coordination of electrical load
balancing. Consumers revised these plans to provide for radio or satellite
communications. Coordinated contingency planning efforts are in progress with
national electric and gas industry associations, other Michigan utilities and
state government agencies. These plans address external factors that could
affect energy delivery and minimize risk to energy generation, transmission and
distribution systems.
EXPECTATIONS: Consumers does not expect that the cost of modifications will
materially affect its financial position, liquidity, or results of operations.
It cannot guarantee, however, that these costs, plans or time estimates will be
achieved. Actual results could differ materially.
Because of the integrated nature of Consumers' business with other energy
companies, utilities, jointly owned facilities operated by other entities, and
business conducted with suppliers and large customers, Consumers may be
indirectly affected by year 2000 compliance complications.
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DERIVATIVES AND HEDGES
MARKET RISK INFORMATION: Consumers' exposure to market risk sensitive
instruments and positions include, but are not limited to, changes in interest
rates, debt prices and equity prices in which Consumers holds less than a 20
percent interest. In accordance with the SEC's disclosure requirements,
Consumers performed a 10 percent sensitivity analysis on its derivative and
non-derivative financial instruments. The analysis measures the change in the
net present values based on a hypothetical 10 percent adverse change in the
market rates to determine the potential loss in fair values, cash flows and
earnings. Losses in excess of the amounts determined could occur if market rates
or prices exceed the 10 percent change used for the analysis. Management does
not believe that a sensitivity analysis alone provides an accurate or reliable
method for monitoring and controlling risk. Therefore, Consumers relies on the
experience and judgment of senior management to revise strategies and adjust
positions, as they deem necessary.
For purposes of the analysis below, Consumers has not quantified short-term
exposures to hypothetically adverse changes in the price or nominal amounts
associated with inventories or trade receivables and payables. Furthermore,
Consumers enters into all derivative financial instruments for purposes other
than trading. In the case of hedges, management believes that any losses
incurred on derivative instruments used as a hedge would be offset by the
opposite movement of the underlying hedged item.
EQUITY SECURITY PRICE RISK: Consumers has an equity investment in companies in
which it holds less than a 20 percent interest in the entity. A hypothetical 10
percent adverse change in market price would result in a $12 million change in
its investment and equity since this equity instrument is currently
marked-to-market through equity. Consumers believes that such an adverse change
would not have a material effect on its consolidated financial position, results
of operation or cash flows.
DEBT PRICE AND INTEREST RATE RISK: Management uses a combination of fixed-rate
and variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital.
As of September 30, 1999, Consumers had outstanding $127 million of
variable-rate debt net of any interest rate swaps. To minimize adverse
interest-rate changes, Consumers entered into fixed interest-rate swaps for a
notional amount of $915 million. Assuming a hypothetical 10 percent adverse
change in market interest rates, Consumers' exposure to earnings is limited to
$1 million. As of September 30, 1999, Consumers has outstanding fixed-rate debt
including fixed-rate swaps of $2.867 billion with a fair value of $2.835
billion. Assuming a hypothetical 10 percent adverse change in market rates,
Consumers would have an exposure of $120 million to its fair value. Consumers
believes that any adverse change in debt price and interest rates would not have
a material effect on its consolidated financial position, results of operation
or cash flows.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "expects," "intends," and "plans," and variations of such words and
similar expressions, are intended to identify forward-looking statements that
involve risk and uncertainty. Consumers bases these statements upon various
assumptions
CE-10
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involving judgments about the future including, among others: the ability to
achieve revenue enhancements; national, regional, and local economic competitive
and regulatory conditions and developments; capital and financial market
conditions including interest rates; weather conditions and other natural
phenomena; adverse regulatory or legal decisions, including environmental laws
and regulations; the pace of deregulation of the natural gas and electric
industries; energy markets, including the timing and extent of changes in
commodity prices for oil, coal, natural gas, natural gas liquids, electricity
and certain related products; the timing and success of business development
efforts; potential disruption or interruption of facilities or operations due to
accidents or political events; nuclear power performance and regulation;
technological developments in energy production, delivery, and usage; the effect
of changes in accounting policies; and year 2000 readiness. All of these
uncertainties are difficult to predict and many are beyond the control of
Consumers. Accordingly, while Consumers believes that the assumed results are
reasonable, there can be no assurance that they will approximate actual results.
Consumers disclaims any obligation to update or revise forward-looking
statements, whether from new information, future events or otherwise. Consumers
details certain risk factors periodically in various public filings it makes
with the SEC.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE
Electric .......................................... $ 753 $ 729 $ 2,052 $ 1,990 $ 2,667 $ 2,617
Gas ............................................... 112 117 792 716 1,128 1,092
Other ............................................. 13 14 41 37 55 48
-----------------------------------------------------------------------
878 860 2,885 2,743 3,850 3,757
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation .................... 98 95 262 246 332 323
Purchased power - related parties ............... 140 143 418 433 559 585
Purchased and interchange power ................. 97 77 226 220 291 282
Cost of gas sold ................................ 44 39 428 377 614 600
Other ........................................... 143 147 423 409 559 548
-----------------------------------------------------------------------
522 501 1,757 1,685 2,355 2,338
Maintenance ....................................... 43 48 122 126 169 177
Depreciation, depletion and amortization .......... 94 93 307 291 418 395
General taxes ..................................... 44 47 148 146 202 199
-----------------------------------------------------------------------
703 689 2,334 2,248 3,144 3,109
- ------------------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
Electric .......................................... 168 153 425 378 522 468
Gas ............................................... (6) 6 87 81 132 134
Other ............................................. 13 12 39 36 52 46
-----------------------------------------------------------------------
175 171 551 495 706 648
-----------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Loss on MCV power purchases ....................... - - - (37) - (37)
Dividends and interest from affiliates ............ 4 4 10 11 13 15
Accretion income 1 1 3 5 5 7
Accretion expense (4) (4) (11) (12) (15) (16)
Other, net ........................................ 1 1 10 3 4 -
-----------------------------------------------------------------------
2 2 12 (30) 7 (31)
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt ........................ 35 35 105 103 140 137
Other interest .................................... 12 9 29 28 39 39
Capitalized interest .............................. - - - - - (1)
----------------------------------------------------------------------
47 44 134 131 179 175
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES ...................... 130 129 429 334 534 442
INCOME TAXES ........................................ 37 43 144 111 168 137
----------------------------------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE ........................... 93 86 285 223 366 305
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
PROPERTY TAXES, NET OF $23 TAX .................... - - - 43 - 43
----------------------------------------------------------------------
NET INCOME .......................................... 93 86 285 266 366 348
PREFERRED STOCK DIVIDENDS ........................... - 5 6 14 10 19
PREFERRED SECURITIES DISTRIBUTIONS .................. 5 4 14 13 18 18
----------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER .......... $ 88 $ 77 $ 265 $ 239 $ 338 $ 311
=============================================================================================================================
The accompanying condensed notes are an integral part of these statements.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 285 $ 266 $ 366 $ 348
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $38, $38, $50 and $51, respectively) 307 291 418 395
Loss on MCV power purchases - 37 - 37
Capital lease and other amortization 28 27 39 36
Accretion expense 11 12 15 16
Accretion income - abandoned Midland project (3) (5) (5) (7)
Deferred income taxes and investment tax credit (7) 21 (8) 24
Undistributed earnings of related parties (40) (37) (53) (48)
MCV power purchases (45) (48) (61) (63)
Cumulative effect of accounting change - (66) - (66)
Changes in other assets and liabilities (2) (46) (4) 81
-------------------------------------------
Net cash provided by operating activities 534 452 707 753
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (291) (258) (402) (358)
Cost to retire property, net (62) (65) (79) (68)
Investments in nuclear decommissioning trust funds (38) (38) (50) (51)
Investment in Electric Restructuring Implementation Plan (24) (9) (31) (10)
Proceeds from FMLP 10 12 10 12
Proceeds from nuclear decommissioning trust funds 29 43 38 43
Proceeds from the sale of two non-utility partnerships - 27 - 27
Associated company preferred stock redemption 50 50 50 50
Other 1 3 - 4
-------------------------------------------
Net cash used in investing activities (325) (235) (464) (351)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of common stock dividends (208) (173) (276) (278)
Retirement of preferred stock (200) - (200) -
Payment of capital lease obligations (28) (26) (35) (36)
Retirement of bonds and other long-term debt (23) (759) (119) (759)
Preferred securities distributions (14) (13) (18) (18)
Payment of preferred stock dividends (9) (14) (14) (19)
Proceeds from bank loans 15 - 15 -
Increase (decrease) in notes payable, net 102 (75) 15 (87)
Proceeds from senior notes - 914 130 914
Contribution from (return of equity to) stockholder 150 (50) 250 (100)
-------------------------------------------
Net cash provided by (used in) financing activities (215) (196) (252) (383)
- -----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS (6) 21 (9) 19
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 25 7 28 9
------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 19 $ 28 $ 19 $ 28
===========================================================================================================
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NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
In Millions
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 131 $ 128 $ 163 $ 165
Income taxes paid (net of refunds) 155 113 194 108
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ 2 $ 21 $ 27 $ 21
Other assets placed under capital leases 11 11 14 12
===========================================================================================================
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30 SEPTEMBER 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
PLANT (AT ORIGINAL COST)
Electric $ 6,920 $ 6,720 $ 6,641
Gas 2,427 2,360 2,328
Other 25 25 26
---------------------------------------
9,372 9,105 8,995
Less accumulated depreciation, depletion and amortization 5,558 4,862 4,748
---------------------------------------
3,814 4,243 4,247
Construction work-in-progress 179 165 165
---------------------------------------
3,993 4,408 4,412
- ----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 147 241 227
First Midland Limited Partnership 238 240 237
Midland Cogeneration Venture Limited Partnership 240 209 199
---------------------------------------
625 690 663
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 19 25 28
Accounts receivable and accrued revenue, less allowances
of $4, $5 and $5, respectively 22 114 -
Accounts receivable - related parties 62 63 77
Inventories at average cost
Gas in underground storage 288 219 276
Materials and supplies 58 67 65
Generating plant fuel stock 37 43 29
Postretirement benefits 25 25 25
Prepaid property taxes and other 85 162 124
---------------------------------------
596 718 624
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Unamortized nuclear costs 506 - -
Postretirement benefits 349 372 380
Abandoned Midland Project 53 71 77
Other 128 133 137
Nuclear decommissioning trust funds 572 557 510
Other 167 214 113
---------------------------------------
1,775 1,347 1,217
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,989 $ 7,163 $ 6,916
================================================================================================================
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STOCKHOLDERS' INVESTMENT AND LIABILITIES SEPTEMBER 30 SEPTEMBER 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 645 502 402
Revaluation capital 41 68 57
Retained earnings since December 31, 1992 437 434 429
-----------------------------------------
1,964 1,845 1,729
Preferred stock 44 238 238
Company-obligated mandatorily redeemable preferred securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 120
Long-term debt 2,009 2,007 1,977
Non-current portion of capital leases 84 100 77
-----------------------------------------
4,321 4,410 4,241
- ------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 148 152 146
Notes payable 317 215 302
Accounts payable 156 190 160
Accrued taxes 89 238 109
Accounts payable - related parties 81 79 72
Power purchases 47 47 47
Accrued interest 31 36 26
Deferred income taxes 5 9 4
Accrued refunds 19 11 12
Other 206 138 143
-----------------------------------------
1,099 1,115 1,021
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 620 666 661
Post-retirement benefits 425 456 467
Deferred investment tax credit 127 134 142
Regulatory liabilities for income taxes, net 121 87 83
Power purchases 87 121 134
Other 189 174 167
-----------------------------------------
1,569 1,638 1,654
- ------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,989 $7,163 $6,916
==================================================================================================================
(a) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36% subordinated deferrable interest notes due 2015 from
Consumers. The primary asset of Consumers Energy Company Financing II is $124
million principal amount of 8.20% subordinated deferrable interest notes due
2027 from Consumers.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841
- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 645 452 502 452 402 502
Stockholder's contribution - - 150 - 250 -
Return of stockholder's contribution - (50) - (50) - (100)
Capital stock reacquired - - (7) - (7) -
--------------------------------------------------------------------
At end of period 645 402 645 402 645 402
- ----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 57 59 68 58 57 45
Change in unrealized investment -
gain (loss) (a) (16) (2) (27) (1) (16) 12
----------------------------------------------------------------------
At end of period 41 57 41 57 41 57
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 438 396 434 363 429 396
Net income (a) 93 86 285 266 366 348
Common stock dividends declared (89) (44) (262) (173) (330) (278)
Preferred stock dividends declared - (5) (6) (14) (10) (19)
Preferred securities distributions (5) (4) (14) (13) (18) (18)
--------------------------------------------------------------------
At end of period 437 429 437 429 437 429
- ----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,964 $1,729 $1,964 $1,729 $1,964 $1,729
================================================================================================================
(a) DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investment - gain (loss),
net of tax of $(9), $(1), $(15), $-
$(9) and $7, respectively $ (16) $ (2) $ (27) $ (1) $ (16) $ 12
Net income 93 86 285 266 366 348
-------------------------------------------------------------------
Total Comprehensive Income $ 77 $ 84 $ 258 $ 265 $ 350 $ 360
====================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the Consumers 1998 Form 10-K that includes the Report of Independent Public
Accountants. In the opinion of management, the unaudited information herein
reflects all adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented.
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers is a combination electric and gas utility company
serving the Lower Peninsula of Michigan and is a subsidiary of CMS Energy, a
holding company. Consumers' customer base includes a mix of residential,
commercial and diversified industrial customers, the largest segment of which is
the automotive industry.
RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS: Consumers and its
subsidiaries use derivative instruments, including swaps and options, to manage
exposure to fluctuations in interest rates and commodity prices, respectively.
To qualify for hedge accounting, derivatives must meet the following criteria:
(1) the item to be hedged exposes the enterprise to price and interest rate
risk; and (2) the derivative reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counter parties, including
financial institutions and energy marketers, fail to perform under the
agreements. Consumers minimizes such risk by performing financial credit reviews
using, among other things, publicly available credit ratings of such counter
parties. The risk of nonperformance by the counter parties is considered remote.
Consumers enters into interest rate swap agreements to exchange variable-rate
interest payment obligations for fixed-rate obligations without exchanging the
underlying notional amounts. These agreements convert variable-rate debt to
fixed-rate debt in order to reduce the impact of interest rate fluctuations. The
notional amounts parallel the underlying debt levels and are used to measure
interest to be paid or received and do not represent the exposure to credit
loss.
Consumers enters into electric option contracts to ensure a reliable source of
capacity to meet its customers' electricity requirements and to limit its risk
associated with electricity price increases. It is management's intent to take
physical delivery of the commodity. Consumers continuously evaluates its daily
capacity needs and sells the option contracts, if marketable, when it has excess
daily capacity. Consumers' maximum exposure associated with these options is
limited to premiums paid.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on a
regulated utility accounting standard (SFAS 71). As a result, the actions of
regulators affect when Consumers recognizes revenues, expenses, assets and
liabilities.
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In March 1999, Consumers received MPSC electric restructuring orders which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Consistent with these orders, Consumers expected to
implement retail open access for its electric customers in September 1999, and
therefore, Consumers discontinued application of SFAS 71 for the energy supply
portion of its business in the first quarter of 1999. Discontinuation of SFAS 71
for the energy supply portion of Consumers' business resulted in Consumers
reducing the carrying value of its Palisades plant-related assets by
approximately $535 million and established a regulatory asset for a
corresponding amount. The regulatory asset is collectible as part of the
Transition Costs which are recoverable through the regulated transmission and
distribution portion of Consumers' business as approved by an MPSC order in
1998. This order also allowed Consumers to recover any energy supply-related
regulatory assets, plus a return on any unamortized balance of those assets,
from its transmission and distribution customers. According to current
accounting standards, Consumers can continue to carry its energy supply-related
regulatory assets or liabilities for the part of the business subject to
regulatory change if legislation or an MPSC rate order allows the collection of
cash flows, to recover specific costs or to settle obligations, from its
regulated transmission and distribution customers. At September 30, 1999,
Consumers had a net investment in energy supply facilities of $934 million
included in electric plant and property.
REPORTABLE SEGMENTS: Consumers has two reportable segments: electric and gas.
The electric segment consists of activities associated with the generation,
transmission and distribution of electricity. The gas segment consists of
activities associated with the production, transportation, storage and
distribution of natural gas. Consumers' reportable segments are domestic
strategic business units organized and managed by the nature of the product and
service each provides. The accounting policies of the segments are the same as
those described in Consumers' 1998 Form 10-K. Consumers' management evaluates
performance based on pretax operating income. The Consolidated Statements of
Income show operating revenue and pretax operating income by reportable segment.
Intersegment sales and transfers are accounted for at current market prices and
are eliminated in consolidated pretax operating income by segment.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: In 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use, and
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. Also
in 1998, the Emerging Issues Task Force published Issue 98-10, Accounting for
Energy Trading and Risk Management Activities. Each of these statements is
effective for 1999. Application of these standards has not had a material affect
on Consumers' financial position, liquidity or results of operations.
2: UNCERTAINTIES
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and nitrogen oxides and requires emissions and air quality monitoring.
Consumers currently operates within these limits and meets current emission
requirements. The Clean Air Act requires the EPA to periodically review the
effectiveness of the national air quality standards in preventing adverse health
effects. In 1997 the EPA revised these standards to impose further limitations
on nitrogen oxide and small particulate-related emissions. In May 1999 a United
States Court of Appeals ruled that the grant of authority to the EPA to revise
the standards as
CE-20
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the EPA did, would amount to an unconstitutional delegation of legislative
power. As a result, the standards will not be implemented under the 1997 rule.
The EPA has requested a rehearing of the court's decision.
In September 1998, based in part upon the 1997 standards, the EPA Administrator
issued final regulations requiring the State of Michigan to further limit
nitrogen oxide emissions. Fossil-fueled emitters, such as Consumers' generating
units, anticipated a reduction in nitrogen oxide emissions by 2003 to only 32
percent of levels allowed for the year 2000. The State of Michigan had one year
to submit an implementation plan. The State of Michigan filed a lawsuit
objecting to the extent of the required emission reductions and requesting an
extension of the submission date. In May 1999 the United States Court of Appeals
granted an indefinite stay of the submission date for the State of Michigan's
implementation plan. Based upon the recent court rulings, it is unlikely that
the State of Michigan will establish Consumers' nitrogen oxide emissions
reduction target until late 1999. Until this target is established, the
estimated cost of compliance discussed below is subject to revision.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions to the level proposed by the State of Michigan for
Consumers' fossil-fueled generating units ranges from $150 million to $290
million, in 1999 dollars. If Consumers had to meet the EPA's 1997 proposed
requirements it is estimated that the cost to Consumers would be between $290
million and $500 million, in 1999 dollars. In both these cases the lower
estimate represents the capital expenditure level that would satisfactorily meet
the proposed emissions limits but would result in higher operating expense. The
higher estimate in the range includes expenditures that result in lower
operating costs while complying with the proposed emissions limit. Consumers
anticipates that these capital expenditures will be incurred between 1999 and
2004, or between 1999 and 2003 if the EPA's limits are imposed.
Consumers may need an equivalent amount of capital expenditures to comply with
the new small particulate standards some time after 2004 if those standards
become effective.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. During the past few years, in order to comply with
the Clean Air Act, Consumers incurred capital expenditures totaling $55 million
to install equipment at certain generating units. Consumers estimates an
additional $16 million of capital expenditures for ongoing and proposed
modifications at the remaining coal-fueled units to meet year 2000 requirements.
Management believes that these expenditures will not materially affect
Consumers' annual operating costs.
Under the Michigan Natural Resources and Environmental Protection Act, Consumers
expects that it will ultimately incur investigation and remedial action costs at
a number of sites. Nevertheless, it believes that these costs are properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated
sites administered under Superfund. Superfund liability is joint and several;
along with Consumers, many other creditworthy, potentially responsible parties
with substantial assets cooperate with respect to the individual sites. Based
upon past negotiations, Consumers estimates that its share of the total
liability for the known Superfund sites will be between $2 million and $9
million.
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At September 30, 1999, Consumers has accrued the minimum amount of the range for
its estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and PCBs. The cost of removal and
disposal of these materials is currently unknown. There may be some radioactive
portion of these materials, which no facility in the United States will
currently accept. The cost of removal and disposal will constitute part of the
cost to decommission the plant and will be paid from the decommissioning fund.
Consumers is studying the extent of the contamination and reviewing options.
ANTITRUST: In October 1997, two independent power producers sued Consumers in a
federal court. The suit alleged antitrust violations relating to contracts,
which Consumers entered into with some of its customers and claims relating to
power facilities. On March 31, 1999, the court issued an opinion and order
granting Consumers' motion for summary judgment, resulting in the dismissal of
the case. The plaintiffs have appealed this decision.
ELECTRIC RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs associated with the purchase of the additional 325 MW
of MCV Facility capacity (see "Power Purchases from the MCV Partnership" in this
Note) and to recover its nuclear plant investment by increasing prospective
annual nuclear plant depreciation expense by $18 million, with a corresponding
decrease in fossil-fueled generating plant depreciation expense. It also
established an experimental direct-access program. Customers having a maximum
demand of 2 MW or greater are eligible to purchase generation services directly
from any eligible third-party power supplier and Consumers will transmit the
power for a fee. The direct-access program is limited to 134 MW of load. In
accordance with the MPSC order, Consumers held a lottery in April 1997 to select
the customers to participate in the direct-access program. Subsequently, direct
access for a portion of this 134 MW began in late 1997. The program was
substantially filled by the end of March 1999. The Attorney General, ABATE, the
MCV Partnership and other parties filed appeals with the Court of Appeals
challenging the MPSC's 1996 order. In August 1999, the Court of Appeals affirmed
the MPSC's 1996 order in all respects. In October 1999, the Attorney General
filed an application for leave to appeal this decision to the Michigan Supreme
Court.
In January 1998, the Court of Appeals affirmed an MPSC conclusion that the MPSC
has statutory authority to authorize an experimental electric retail wheeling
program. In June 1999, the Michigan Supreme Court reversed the Court of Appeals
and vacated the 1995 MPSC retail wheeling orders. The Court found that the MPSC
does not have the statutory authority to order a mandatory retail wheeling
program.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC in June
1997 issued an order proposing that beginning January 1, 1998 Consumers transmit
and distribute energy on behalf of competing power suppliers to retail
customers. Further restructuring orders issued in late 1997 and early 1998
provide for: 1) recovery of estimated Transition Costs of $1.755 billion through
a charge to all customers purchasing their power from other sources until the
end of the transition period in 2007, subject to an adjustment through a true-up
mechanism; 2) commencement of the phase-in of retail open access in 1998
(subsequently extended to September 1999); 3) suspension of the PSCR process as
discussed below; and 4) the right of all customers to choose
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their power suppliers on January 1, 2002. The recovery of costs of implementing
a retail open access program, preliminarily estimated at an additional $200
million, would be reviewed for prudence and recovered via a charge approved by
the MPSC. Nuclear decommissioning costs would also continue to be collected
through a separate surcharge to all customers.
In June 1998, Consumers submitted its plan for implementing retail open access
to the MPSC. The primary issues addressed in the plan are: 1) the implementation
schedule; 2) the retail open access service options available to customers and
suppliers; 3) the process and requirements for customers and others to obtain
retail open access service; and 4) the roles and responsibilities for Consumers,
customers and suppliers. In March 1999, Consumers received MPSC electric
restructuring orders, which generally supported Consumers' implementation plan.
Consumers began implementing electric retail customer open access in September
1999, and will extend open access to 750 MW of Consumers' retail market by 2001.
On January 1, 2002, all of Consumers' electric customers will have the right to
choose generation suppliers.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders. Because of the June 1999 Michigan Supreme Court
decision described above in "Electric Proceedings", Consumers believes that the
MPSC lacks statutory authority to mandate industry restructuring. Although
Consumers filed an appeal of the restructuring orders which asked the court to
rule that the MPSC could not mandate industry restructuring, Consumers has
subsequently requested to have that appeal dismissed. Subsequent to the June
1999 Michigan Supreme Court decision, the MPSC requested comments from any
interested party concerning the effect of the Supreme Court's decision on these
matters. Following receipt of comments, the MPSC issued an order on August 17,
1999 finding that it has jurisdiction to approve rates, terms, and conditions
for electricity retail wheeling (also known as electric customer choice) if a
utility voluntarily chooses to offer that service. The August 17th order also
requested that Consumers file a statement if it intended to continue with its
electric customer choice program. On September 1, 1999 Consumers filed a
statement reaffirming its decision to continue carrying out the customer choice
program as previously approved by the MPSC. ABATE and the Attorney General have
each appealed the August 17th order to the Court of Appeals. Both ABATE and the
Attorney General subsequently filed applications with the Michigan Supreme Court
asking that Court to bypass the Court of Appeals and immediately review the
lawfulness of the August 17th order. It is uncertain how the issues raised by
the MPSC's August 17th order will be resolved by the regulatory process, the
appellate courts or by legislation codifying the retail wheeling and related
Transition Cost recovery issues.
Several bills relative to electric restructuring have been introduced in the
Michigan legislature for consideration in the 1999-2000 legislative session.
Although Consumers has not specifically supported any of these bills, Consumers
believes legislation is desirable to provide statutory support for the MPSC
orders. Consumers is uncertain as to whether legislation will be enacted and
what effect any enacted legislation will have on Consumers. Similar uncertainty
exists with respect to the possibility that federal legislation restructuring
the electric power industry will be enacted. A variety of bills changing
existing federal regulation of the industry and potentially affecting state
regulation have been introduced in Congress in recent years. None has been
enacted.
Consumers believes progress is being made in discussions with its major
commercial and industrial customers, which, if successful, would result in
agreement on the need for, and substance of, electric restructuring legislation
in Michigan and have the effect of resolving
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Consumers' rate proceedings pending before the MPSC. While there are no
assurances that an agreement or legislation will result, Consumers is optimistic
that a positive outcome of the discussions can be achieved. Consumers cannot
predict the outcome of electric restructuring on it's financial position,
liquidity, or results of operations.
As a result of a 1998 MPSC order in connection with the electric restructuring
program, the PSCR process was suspended. Under this suspension, customers
previously subject to the PSCR mechanism will not have their rates adjusted to
reflect the actual costs of fuel and purchased and interchanged power during the
1998-2001 period. In prior years, when the PSCR process was employed, any change
in power supply costs was passed through to customers. In order to reduce the
risk of high energy prices during peak demand periods, Consumers purchased daily
call options, at a cost of approximately $19 million, to insure a reliable
source of energy during the months of June through September 1999, and expects
to use a similar strategy in the future. Consumers is planning to have
sufficient generation and purchased capacity for approximately a 15 percent
reserve margin in order to provide reliable service to its electric service
customers and to protect itself against unscheduled plant outages. Under certain
circumstances, the cost of purchasing energy on the spot market could be
substantial.
In June 1999, Consumers and four other electric utility companies sought
approval from the FERC to form the Alliance Regional Transmission Organization.
The proposed structure will provide for the creation of a transmission entity
that would control, operate and own transmission facilities of one or more of
the member companies, and would control and operate, but not necessarily own,
the transmission facilities of other companies. The proposal is structured to
give the member companies the flexibility to maintain or divest ownership of
their transmission facilities while ensuring independent operation of the
regional transmission system. The member companies have requested the FERC to
approve the proposed request by December 31, 1999.
Consumers is uncertain of the outcome of this matter.
OTHER ELECTRIC UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings-
In Millions
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
Pretax operating income $13 $13 $39 $36 $52 $46
Income taxes and other 4 4 12 11 16 14
- ---------------------------------------------------------------------------------------------------------
Net income $9 $9 $27 $25 $36 $32
=========================================================================================================
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Power Purchases from the MCV Partnership- Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, Consumers has been permitted by the MPSC to recover capacity charges
averaging 3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed
and variable energy charges. Since January 1, 1996, Consumers also has been
permitted to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. Because
the MPSC has already approved recovery of these capacity costs, Consumers will
recover these increases through an adjustment to the currently frozen PSCR
factor that will be effective through 2001. Consumers expects to recover the
remaining increases through the Transition Cost true-up process and through
further adjustments to the PSCR factor. After September 2007, under the terms of
the PPA, Consumers will only be required to pay the MCV Partnership capacity and
energy charges that the MPSC has authorized for recovery from electric
customers.
In March 1999, Consumers signed a long-term power sales agreement to resell to
PECO its capacity and energy purchases under the PPA until September 2007. After
a three-year transition period during which 100 to 150 MW will be sold to PECO,
beginning in 2002 Consumers will sell all 1,240 MW of PPA capacity and
associated energy to PECO. In March 1999, Consumers also filed an application
with the MPSC for accounting and ratemaking approvals related to the PECO
agreement. If used as an offset to electric customers Transition Cost
responsibility, Consumers estimates that there could be a reduction of as much
as $58 million (on a net present value basis) of Transition Cost related to the
MCV PPA. In an order issued in April 1999, the MPSC conditionally approved the
requests for accounting and rate-making treatment to the extent that customer
rates are not increased from their level absent the agreement and as modified by
the order. In response to Consumers' and other parties' requests for
clarification and rehearing, in an August 1999 opinion, the MPSC partially
granted the relief Consumers requested on rehearing and attached certain
additional conditions to its approval. Those conditions relate to Consumers
continued decision to carry out the electricity customer choice program (which
Consumers has affirmed as discussed above) and a determination to revise its
capacity solicitation process (which Consumers has filed but is awaiting an MPSC
decision). The August opinion is a companion order to a power supply cost
reconciliation order issued on the same date in another case. This order affects
the level of frozen power supply costs recoverable in rates during future years
when the transaction with PECO would be taking place. Consumers filed a motion
for clarification of the order relating to the PECO agreement.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC recovery
orders. At September 30, 1999 and September 30, 1998, the remaining after-tax
present value of the estimated future PPA liability associated with the 1992
loss totaled $87 million and $118 million, respectively. At September 30, 1999,
the undiscounted after-tax amount associated with this liability totaled $148
million. These after-tax cash underrecoveries are based on the assumption that
the MCV Facility would be available to generate electricity 91.5 percent of the
time over its expected life. Historically the MCV Facility has operated above
the 91.5 percent level. Accordingly, in 1998, Consumers increased its PPA
liability by $37 million. Because the MCV Facility operated above the 91.5
percent level in 1998 and thus far in 1999,
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Consumers has an accumulated unrecovered after-tax shortfall of $24 million as
of September 30, 1999. Consumers believes that this shortfall will be resolved
as part of the electric restructuring effort. If the MCV Facility generates
electricity at the 91.5 percent level during the next five years, Consumers'
after-tax cash underrecoveries associated with the PPA would be as follows.
In Millions
- ---------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
- ---------------------------------------------------------------------------------------------------------
Estimated cash underrecoveries, net of tax $35 $21 $20 $19 $18
=========================================================================================================
If the MCV Facility operates at availability levels above management's 91.5
percent estimate made in 1992 for the remainder of the PPA, Consumers will need
to recognize additional losses for future underrecoveries. In March 1999,
Consumers and the MCV Partnership reached an agreement effective January 1, 1999
that will cap availability payments to the MCV Partnership at 98.5 percent. For
further discussion on the impact of the frozen PSCR, see "Electric
Restructuring" in this Note. Management is evaluating the adequacy of the
contract loss liability considering actual MCV Facility operations and any other
relevant circumstances.
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders in the electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the U.S.
District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. In July 1999, the U.S. District Court
issued an order granting the MCV Partnership's motion for summary judgment. The
order permanently prohibits two of the incumbent commissioners from enforcing
the restructuring orders in any manner which denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or which
precludes the MCV Partnership from recovering the avoided cost rate.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good.
The NRC suspended this same assessment process for all licensees in 1998. Until
such time as the NRC completes its review of processes for assessing performance
at nuclear power plants, the Plant Performance Review is being used to provide
an assessment of licensee performance. Palisades received its annual performance
review dated March 26, 1999 in which the NRC stated that the overall performance
at Palisades was acceptable.
Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity.
Consequently, Consumers is using NRC-approved steel and concrete vaults,
commonly known as "dry casks", for temporary on-site storage. As of September
30, 1999 Consumers had loaded 18 dry storage casks with spent nuclear fuel at
Palisades. In June 1997, the NRC approved Consumers' process for unloading spent
fuel from a cask previously discovered to have minor weld flaws. Consumers
intends to transfer the spent fuel to a new transportable cask when one is
available.
On October 15, 1999 a planned forty-day refueling and maintenance outage began
at Palisades. Consumers will replace certain nuclear fuel assemblies and 2
low-pressure steam turbines during the outage.
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Consumers maintains insurance against property damage, debris removal, personal
injury liability and other risks that are present at its nuclear generating
facilities. Consumers also maintains coverage for replacement power costs during
prolonged accidental outages at Palisades. Insurance would not cover such costs
during the first 12 weeks of any outage, but would cover most of such costs
during the next 52 weeks of the outage, followed by reduced coverage to 80
percent for 110 additional weeks. If certain covered losses occur at its own or
other nuclear plants similarly insured, Consumers could be required to pay
maximum assessments of $15 million in any one year to NEIL; $88 million per
occurrence under the nuclear liability secondary financial protection program,
limited to $10 million per occurrence in any year; and $6 million if nuclear
workers claim bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.
The NRC requires Consumers to make certain calculations and report on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock events during its remaining license life, considering
the embrittlement of reactor materials. In December 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor vessel
can be safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. Consumers believes that with fuel management designed
to minimize embrittlement, it can operate Palisades to the end of its license
life in the year 2007 without annealing the reactor vessel. Nevertheless,
Consumers will continue to monitor the matter.
NUCLEAR PLANT DECOMMISSIONING: Consumers collected $51 million in 1998 from its
electric customers for decommissioning of its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. On March 22, 1999,
Consumers received a decommissioning order from the MPSC that approved estimated
decommissioning costs for Big Rock and Palisades of $304 million and $541
million (in 1998 dollars), respectively. Consumers' site-specific
decommissioning cost estimates for Big Rock and Palisades assume that each plant
site will eventually be restored to conform to the adjacent landscape, and all
contaminated equipment will be disassembled and disposed of in a licensed burial
facility. The MPSC order also reduced annual decommissioning surcharges by $4
million a year and required Consumers to file revised decommissioning surcharges
for Palisades that incorporate a gradual reduction in the decommissioning
trust's equity investments following the plant's retirement. On April 21, 1999,
Consumers filed with the MPSC a revised decommissioning surcharge for Palisades
and anticipates a revised MPSC order in early 2000. If approved, the annual
decommissioning surcharges for Palisades would be reduced by an additional $4
million a year. Settlement discussions are underway which could further reduce
the annual recovery. After retirement of Palisades, Consumers plans to maintain
the facility in protective storage if radioactive waste disposal facilities are
not available. Consumers will incur most of the Palisades decommissioning costs
after the plant's NRC operating license expires. When the Palisades' NRC license
expires in 2007, the trust funds are currently estimated to have accumulated
$677 million, assuming current surcharge levels. Consumers estimates that at the
time Palisades is fully decommissioned in the year 2046, the trust funds will
have provided $1.9 billion, including trust earnings, over this decommissioning
period. As of September 30, 1999, Consumers had an investment in nuclear
decommissioning trust funds of $392 million for Palisades and $180 million for
Big Rock.
Big Rock was closed permanently in 1997 because management determined that it
would be uneconomical to operate in an increasingly competitive environment. The
plant was originally
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scheduled to close on May 31, 2000, at the end of the plant's operating license.
The MPSC has allowed Consumers to continue collecting decommissioning surcharges
through December 31, 2000. Plant decommissioning began in 1997 and it may take
five to ten years to return the site to its original condition. For the first
nine months of 1999, Consumers spent $37 million for the decommissioning and
withdrew $29 million from the Big Rock nuclear decommissioning trust fund. In
total, Consumers has spent $112 million for the decommissioning and withdrew
$103 million from the Big Rock nuclear decommissioning trust fund. These
activities had no impact on net income.
CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments, of $400 million for 1999, $435 million for
2000, and $520 million for 2001. For further information, see the Capital
Expenditures Outlook section in the MD&A.
GAS CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites, including some 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. Consumers has completed
initial investigations at the 23 sites. On sites where Consumers has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Consumers has estimated its costs related to further investigation
and remedial action for all 23 sites using the Gas Research
Institute-Manufactured Gas Plant Probabilistic Cost Model. Using this model the
costs are estimated to be between $66 million and $118 million. These estimates
are based on undiscounted 1999 costs. Using the low end of the range, Consumers
estimates its remaining expenditures at $63 million as of September 30, 1999 and
has accrued a liability for the same amount and also established a corresponding
regulatory asset. Any significant change in assumptions, such as remediation
techniques, nature and extent of contamination, and legal and regulatory
requirements, could affect the estimate of remedial action costs for the sites.
Consumers defers and amortizes over a period of ten years, environmental
clean-up costs above the amount currently being recovered in rates. Rate
recognition of amortization expense will not begin until after a prudence review
in a general rate case. Consumers is allowed current recovery of $1 million
annually. Consumers has initiated lawsuits against certain insurance companies
regarding coverage for some or all of the costs that it may incur for these
sites.
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GAS RATE MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement an experimental gas transportation program, which will extend over a
three-year period, and allow up to 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas commodity supplier.
The program is voluntary and participating natural gas customers are selected on
a first-come, first-served basis, up to a limit of 100,000 per year. As of
September 30, 1999, more than 181,000 customers chose alternative gas suppliers,
representing approximately 42 bcf of gas load. The program allows Consumers to
earn a margin on the gas commodity provided it can continue to purchase gas at
prices below the $2.84/mcf cost allowed in its rate. Customers choosing to
remain as sales customers of Consumers will not see a rate change in their
natural gas rates. This three-year program: 1) suspends Consumers' GCR clause,
effective April 1, 1998, establishing a gas commodity cost at a fixed rate of
$2.84 per mcf, allowing Consumers the opportunity to benefit by reducing its
cost of the commodity; 2) establishes an earnings sharing mechanism with
customers if Consumers' earnings exceed certain pre-determined levels; and 3)
establishes a gas transportation code of conduct that addresses the relationship
between Consumers and marketers, including its affiliated marketers. In January
1998, the Attorney General, ABATE and other parties filed claims of appeal
regarding the program with the Court of Appeals.
Consumers uses gas purchase contracts to limit its risk associated with
increases in its gas price above the $2.84 per mcf during the three-year
experimental gas program. It is management's intent to take physical delivery of
the commodity and failure could result in a significant penalty for
nonperformance. At September 30, 1999, Consumers had an exposure to gas price
increases if the ultimate cost of gas was to exceed $2.84 per mcf for the
following volumes: 3 percent of its 1999 requirements; 55 percent of its 2000
requirements; and 55 percent of its first quarter 2001 requirements. Additional
contract coverage is currently under review. The gas purchase contracts
currently in place were consummated at an average price of less than $2.84 per
mcf. The gas purchase contracts are being used to protect against gas price
increases in the three-year experimental gas program where Consumers is
recovering from its customers $2.84 per mcf for gas.
OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: Consumers estimates gas capital expenditures, including
new lease commitments, of $125 million for 1999, and $130 million for each of
2000 and 2001. For further information, see the Capital Expenditures Outlook
section in the MD&A.
In addition to the matters disclosed in this note, Consumers and certain of its
subsidiaries are parties to certain lawsuits and administrative proceedings
before various courts and governmental agencies arising from the ordinary course
of business. These lawsuits and proceedings may involve personal injury,
property damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Consumers has accrued estimated losses for certain contingencies discussed in
this Note. Resolution of these contingencies is not expected to have a material
adverse impact on Consumers' financial position, liquidity, or results of
operations.
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3: SHORT-TERM FINANCINGS AND CAPITALIZATION
AUTHORIZATION: At September 30, 1999, Consumers had FERC authorization to issue
or guarantee, through June 2000, up to $900 million of short-term securities
outstanding at any one time and to guarantee, through 1999, up to $25 million in
loans made by others to residents of Michigan for making energy-related home
improvements. Consumers also had remaining FERC authorization to issue, through
June 2000, up to $275 million and $390 million of long-term securities with
maturities up to 30 years for refinancing purposes and for general corporate
purposes, respectively.
SHORT-TERM FINANCING: Consumers has an unsecured $300 million credit facility
and unsecured lines of credit aggregating $135 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At September 30, 1999, a
total of $317 million was outstanding at a weighted average interest rate of 6.1
percent, compared with $302 million outstanding at September 30, 1998, at a
weighted average interest rate of 6.3 percent. In January 1999, Consumers
renegotiated a variable-to-fixed interest rate swap totaling $175 million. In
September 1999, Consumers entered into two variable-to-fixed interest rate swaps
totaling $740 million.
Consumers also has in place a $325 million trade receivables sale program. At
September 30, 1999 and 1998, receivables sold under the program totaled $314
million and $307 million, respectively. Accounts receivable and accrued revenue
in the Consolidated Balance Sheets have been reduced to reflect receivables
sold.
LONG-TERM FINANCINGS: Consumers issued long-term bank debt of $15 million in
February 1999, maturing in February 2002, at an initial interest rate of 5.3
percent. Proceeds from this issuance were used for general corporate purposes.
On April 1, 1999, Consumers redeemed all eight million outstanding shares of its
$2.08 preferred stock at $25.00 per share for a total of $200 million.
Subsequent to quarter end, 7 million shares of 9.25 percent Trust Preferred
Securities were issued and sold through Consumers Energy Company Financing III,
a wholly owned business trust consolidated with Consumers. Net proceeds from the
sale totaled approximately $170 million. Consumers formed the trust for the sole
purpose of issuing the Trust Preferred Securities. Consumers' obligations with
respect to the Trust Preferred Securities under the related tax-deductible
notes, under the indenture through which Consumers issued the notes, under
Consumers' guarantee of the Trust Preferred Securities, and under the
declaration by the trust, taken together, constitute a full and unconditional
guarantee by Consumers of the trust's obligations under the Trust Preferred
Securities.
Under the provisions of its Articles of Incorporation, Consumers had $318
million of unrestricted retained earnings available to pay common dividends at
September 30, 1999. In May 1999, Consumers declared and paid a $76 million
common dividend. In July 1999, Consumers declared a $35 million common dividend
which was paid in August 1999. In September 1999, Consumers declared a $55
million common dividend payable in November 1999.
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Report of Independent Public Accountants
To Consumers Energy Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy
Corporation) and subsidiaries as of September 30, 1999 and 1998, the related
consolidated statements of income and common stockholder's equity for the
three-month, nine-month, and twelve-month periods then ended, and the related
consolidated statements of cash flows for the nine-month and twelve-month
periods then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Energy Company and subsidiaries
as of December 31, 1998, and the related consolidated statements of income,
common stockholder's equity and cash flows for the year then ended (not
presented herein), and, in our report dated January 26, 1999 (except with
respect to the matter disclosed in Note 2, "Electric Rate Matters", as to which
the date is March 29, 1999), we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1998, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Detroit, Michigan,
November 10, 1999.
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PANHANDLE EASTERN PIPE LINE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Panhandle is primarily engaged in the interstate transportation and storage of
natural gas. Panhandle owns an LNG regasification plant and related tanker port
unloading facilities and LNG and gas storage facilities. The rates and
conditions of service of interstate natural gas transmission, storage and LNG
operations of Panhandle are subject to the rules and regulations of the FERC.
The MD&A of this Form 10-Q should be read along with the MD&A and other parts of
Panhandle's 1998 Form 10-K. This MD&A also refers to, and in some sections
specifically incorporates by reference, Panhandle's Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Statements and Notes. This report contains forward-looking statements, as
defined by the Private Securities Litigation Reform Act of 1995. While
forward-looking statements are based on assumptions and such assumptions are
believed to be reasonable and are made in good faith, Panhandle cautions that
assumed results almost always vary from actual results and differences between
assumed and actual results can be material. The type of assumptions that could
materially affect the actual results are discussed in the Forward-Looking
Information section in this MD&A. More specific risk factors are contained in
various public filings made by Panhandle with the SEC. This report also
describes material contingencies in the Notes to Consolidated Financial
Statements and the readers are encouraged to read such Notes.
On March 29, 1999, Panhandle Eastern Pipe Line Company and its principal
consolidated subsidiaries, Trunkline and Pan Gas Storage, as well as Panhandle
Eastern Pipe Line Company's affiliates, Trunkline LNG and Panhandle Storage,
were acquired from subsidiaries of Duke Energy by CMS Panhandle Holding, which
was an indirect wholly owned subsidiary of CMS Energy. Immediately following the
acquisition, Trunkline LNG and Panhandle Storage became direct wholly owned
subsidiaries of Panhandle Eastern Pipe Line Company.
Prior to the acquisition, Panhandle's interests in Northern Border Pipeline
Company, Panhandle Field Services Company, Panhandle Gathering Company, and
certain other assets, including the Houston corporate headquarters building,
were transferred to other subsidiaries of Duke Energy; certain intercompany
accounts and notes between Panhandle and Duke Energy subsidiaries were
eliminated; with respect to certain other liabilities, including tax,
environmental and legal matters, CMS Energy was indemnified for any resulting
losses. In addition, Duke Energy agreed to continue its environmental clean-up
program at certain properties and to defend and indemnify Panhandle against
certain future environmental litigation and claims with respect to certain
agreed-upon sites or matters.
CMS Panhandle Holding privately placed $800 million of senior unsecured notes
and received a $1.1 billion initial capital contribution from CMS Energy to fund
the acquisition of Panhandle. On June 15, 1999, CMS Panhandle Holding was merged
into Panhandle, at which point the CMS Panhandle Holding notes became direct
obligations of Panhandle. In August 1999, Panhandle initiated an exchange offer
which replaced the $800 million of notes originally issued by CMS Panhandle
Holding with substantially identical SEC-registered notes issued by Panhandle.
Panhandle completed the exchange offer in September 1999. The acquisition by CMS
Panhandle Holding was accounted for using the purchase method of accounting,
with Panhandle preliminarily allocating the purchase price paid by CMS Panhandle
Holding to Panhandle's net assets as of the acquisition date. Accordingly, the
post-acquisition financial statements reflect a new basis of accounting, and
pre-acquisition period and post-acquisition period financial results are
presented but are not comparable (See Note 1).
PE-1
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85
The final determination of the fair market value of Panhandle's net assets
acquired and the associated estimated remaining useful lives of the property,
plant and equipment are pending the results of ongoing studies. Accordingly, the
amounts presented are subject to change, but any differences in the final
purchase price allocation are not expected to have a material effect on
Panhandle's financial statements.
RESULTS OF OPERATIONS
NET INCOME:
In Millions
- --------------------------------------------------------------------------------------
September 30 1999 1998 Change
- --------------------------------------------------------------------------------------
Nine Months Ended $ 62 $ 64 $ (2)
======================================================================================
For the three months ended September 30, 1999, net income was $14 million, up $3
million from the corresponding period in 1998. Total natural gas transportation
volumes for the three months ended September 30, 1999 increased 7 percent from
the same period in 1998. For the nine months ended September 30, 1999, net
income was $62 million, down $2 million from the corresponding period in 1998.
Total natural gas transportation volumes for the nine months ended September 30,
1999 decreased 2 percent from the same period in 1998.
Revenues for the three months and the nine months ended September 30, 1999
decreased $2 million and $19 million, respectively, from the corresponding
periods in 1998 due primarily to declining reservation rates and revenues and
the transfer of Panhandle Field Services to Duke Energy in March 1999, partially
offset by Trunkline LNG terminalling revenues in 1999.
Operating expenses for the three months and the nine months ended September 30,
1999 decreased $7 million and $18 million, respectively, from the corresponding
periods in 1998, primarily as a result of the transfer of Panhandle Field
Services to Duke Energy and lower administrative costs.
Interest on long-term debt for the three months and nine months ended September
30, 1999 increased $12 million and $26 million from the corresponding periods in
1998 primarily due to interest on the new debt assumed by Panhandle (See Note
11). Other interest decreased $14 million and $27 million for the three months
and nine months ended September 30, 1999 from the corresponding periods in 1998
primarily due to interest on the intercompany note with PanEnergy, which was
eliminated with the sale of Panhandle to CMS Panhandle Holding (See Note 1 and
Note 3).
PE-2
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OPERATING INCOME:
In Millions
- --------------------------------------------------------------------------------------------------------
Nine Months
Ended September 30
Change Compared to Prior Year 1999 vs. 1998
- --------------------------------------------------------------------------------------------------------
Commodity revenue $ (1)
Reservation and other revenues (18)
Operations and maintenance 19
General taxes (1)
--------------------------
Total Change $ (1)
========================================================================================================
CASH POSITION AND INVESTING
OPERATING ACTIVITIES: Panhandle's consolidated net cash provided by operating
activities is derived mainly from the transportation and storage of natural gas.
Consolidated cash from operations totaled $122 million and $119 million for the
first nine months of 1999 and 1998, respectively. Panhandle uses operating cash
primarily to maintain and expand its gas systems and pay dividends.
INVESTING ACTIVITIES: Panhandle's consolidated net cash used in investing
activities totaled $1.9 billion and $119 million for the first nine months of
1999 and 1998, respectively. The increase of $1.8 billion primarily reflects
proceeds paid for the acquisition of Panhandle from subsidiaries of Duke Energy,
partially offset by decreased capital expenditures due to the 1998 expenditures
related to the Terrebonne expansion project in the Gulf of Mexico and the
transfer of Panhandle Field Services to Duke Energy.
FINANCING ACTIVITIES: Panhandle's consolidated net cash provided by financing
activities totaled $1.8 billion for the first nine months of 1999. The $1.8
billion increase in cash sources primarily reflects the proceeds from capital
contributions and senior notes utilized to acquire Panhandle, offset by loans to
parent and dividends paid.
CAPITAL EXPENDITURES
Panhandle estimates capital expenditures and investments, including allowance
for funds used during construction, for the next three years to be approximately
$60 million for each year. These estimates are prepared for planning purposes
and are subject to revision. Capital expenditures for 1999 are being satisfied
by cash from operations.
PE-3
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OUTLOOK
The market for transmission of natural gas to the Midwest is increasingly
competitive and may become more so in light of projects in progress to increase
Midwest transmission capacity for gas originating in Canada and the Rocky
Mountain region. As a result, there continues to be pressure on prices charged
by Panhandle and an increasing necessity to discount the prices charged from the
legal maximum. Panhandle continues to be selective in offering discounts to
maximize revenues from existing capacity and to advance projects that provide
expanded services to meet the specific needs of customers. As a result of
Panhandle's new cost basis resulting from the merger with CMS Panhandle Holding,
which includes costs not likely to be considered for regulatory recovery, in
addition to the level of discounting being experienced by Panhandle, it no
longer meets the criteria of SFAS 71 and has discontinued application of SFAS 71
(See Note 10). The discontinuance is not expected to materially affect
Panhandle's financial position, liquidity, or results of operations.
OTHER MATTERS
REGULATORY MATTERS
The interstate natural gas transmission industry currently is regulated on a
basis designed to recover the costs (including depreciation and return on
investment) of providing services to customers. In July 1998, the FERC issued a
NOPR on short-term interstate natural gas transportation services, which
proposed an integrated package of revisions to its regulations governing such
services. "Short term" has been defined in the NOPR as all transactions of less
than one year. Under the proposed approach, cost-based regulation would be
eliminated for short-term transportation and replaced by regulatory policies
intended to maximize competition in the short-term transportation market,
mitigate the ability of companies to exercise residual monopoly power and
provide opportunities for greater flexibility providing pipeline services. The
proposed changes include initiatives to revise pipeline scheduling procedures,
receipt and delivery point policies and penalty policies, and require pipelines
to auction short-term capacity. Other proposed changes would improve the FERC's
reporting requirements, permit pipelines to negotiate rates and terms of
services, and revise certain rate and certificate policies that affect
competition.
In conjunction with the NOPR, the FERC also issued a NOI on its pricing policies
for the long-term markets. The NOI sought comments on whether FERC's policies
are biased toward either short-term or long-term service, provide accurate price
signals and the right incentives for pipelines to provide optimal transportation
services and construct facilities that meet future demand, and do not result in
over-building and excess capacity.
Comments on the NOPR and NOI were filed by Panhandle in April 1999. Because
these notices are at a very early stage and ultimate resolution is unknown,
management cannot estimate the effects of these matters on future consolidated
results of operations or financial position.
For detailed information about other uncertainties, see Note 2, Regulatory
Matters, incorporated by reference herein.
PE-4
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88
NEW ACCOUNTING RULES
In 1998, SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
was issued. Panhandle is required to adopt this standard by January 1, 2001.
SFAS 133 requires that all derivatives be recognized as either assets or
liabilities and measured at fair value, and it defines the accounting for
changes in the fair value of the derivatives depending on the intended use of
the derivative. Panhandle is currently reviewing the expected impact of SFAS 133
on its financial statements and has not yet determined the timing of or method
of adoption.
YEAR 2000 COMPUTER MODIFICATIONS
STATE OF READINESS: In 1996, Panhandle initiated its Year 2000 Readiness Program
and began a formal review of computer-based systems and devices that are used in
its business operations. These systems and devices include customer information,
financial, materials management and personnel systems, as well as components of
natural gas production, gathering, processing and transmission.
Panhandle is using a three-phase approach to address year 2000 issues: 1)
inventory and preliminary assessment of computer systems, equipment and devices;
2) detailed assessment and remediation planning; and 3) conversion, testing and
contingency planning. Panhandle is employing a combination of systems repair and
planned systems replacement activities to achieve year 2000 readiness for its
business and process control systems, equipment and devices. As of June 30,
1999, Panhandle had achieved Year 2000 readiness of its critical systems,
equipment and devices. Business acquisitions routinely involve an analysis of
year 2000 readiness and are incorporated into Panhandle's overall program as
necessary.
Panhandle is actively evaluating and tracking year 2000 readiness of third
parties with which it has a significant relationship. Such third parties include
vendors, customers, governmental agencies and other business associates. While
the year 2000 readiness of third parties cannot be controlled, Panhandle is
attempting to assess the readiness of third parties and any potential
implications to its operations. Alternative suppliers of critical products,
goods and services are being identified, where necessary.
COSTS: Management believes it is devoting the resources necessary to achieve
year 2000 readiness in a timely manner. Current estimates for total costs of the
program, including internal labor as well as consulting and contract costs, are
approximately $500,000 of which the majority of the costs have already been
incurred as of September 30, 1999. The costs exclude replacement systems that,
in addition to being year 2000 ready, provide significantly enhanced
capabilities which will benefit operations in future periods.
RISKS: Management believes it has an effective program in place to manage the
risks associated with the year 2000 issue in a timely manner. Nevertheless,
since it is not possible to anticipate all future outcomes, especially when
third parties are involved, there could be circumstances in which Panhandle
would temporarily be unable to deliver services to its customers. Management
believes that the most reasonably likely worst case scenario would be minor,
localized interruptions of service, which likely would be rapidly restored. In
addition, there could be a temporary reduction in the service needs of customers
due to their own year 2000 problems. In the event that such a scenario occurs,
it is not expected to have a material adverse impact on results of operations or
financial position.
PE-5
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89
CONTINGENCY PLANS: Year 2000 contingency planning addresses continuity of
business operations for all periods during which year 2000 impacts may occur.
Panhandle is participating in multiple industry efforts to facilitate effective
year 2000 contingency plans, and has completed its own year 2000 contingency
plans. These plans address various year 2000 risk scenarios that cross
departmental, business unit and industry lines as well as specific risks from
various internal and external sources, including supplier readiness. The plans
will be updated throughout the remainder of the year to address new or changing
information.
Based on assessments completed to date and compliance plans in process,
management believes that year 2000 issues, including the cost of making critical
systems, equipment and devices ready, will not have a material adverse effect on
Panhandle's business operation, results of operations or financial position.
Nevertheless, achieving year 2000 readiness is subject to risks and
uncertainties, including those described above. While management believes the
possibility is remote, if Panhandle's internal systems, or the internal systems
of third parties with which it has a significant relationship, fail to achieve
year 2000 readiness in a timely manner, Panhandle's business operation, results
of operations or financial position could be adversely affected.
FORWARD-LOOKING INFORMATION
From time to time, Panhandle may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. Panhandle cautions that assumptions,
projections, expectations, intentions or beliefs about future events may and
often do vary from actual results and the differences between assumptions,
projections, expectations, intentions or beliefs and actual results can be
material. Accordingly, there can be no assurance that actual results will not
differ materially from those expressed or implied by the forward-looking
statements. The following are some of the factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements: entry of competing pipelines into Panhandle's
markets and competitive strategies of competing pipelines, including rate and
other pricing practices; state and federal legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on rate
structures, and affect the speed and degree to which competition enters the
natural gas industry; the weather and other natural phenomena; the timing and
extent of changes in prices of commodities (primarily natural gas and competing
fuels) and interest rates; changes in environmental and other laws and
regulations to which Panhandle is subject or other external factors over which
Panhandle has no control; the results of financing efforts; expansion and other
growth opportunities; year 2000 readiness; and the effect of accounting policies
issued periodically by accounting standard-setting bodies.
PE-6
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90
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions)
THREE MONTHS ENDED
SEPTEMBER 30
----------------------
Nine
Months
Mar. 29- Jan. 1- Ended
Sep. 30, Mar. 28 Sep. 30,
1999 1998 1999 1999 1998
------ ------ -------- ------- --------
OPERATING REVENUE
Transportation and storage of natural gas $ 98 $ 109 $ 199 $ 123 $ 346
Other 9 - 17 5 17
----- ----- ----- ----- -----
Total operating revenue 107 109 216 128 363
----- ----- ----- ----- -----
OPERATING EXPENSES
Operation and maintenance 44 51 85 40 144
Depreciation and amortization 15 15 30 14 44
General taxes 7 7 14 7 20
----- ----- ----- ----- -----
Total operating expenses 66 73 129 61 208
----- ----- ----- ----- -----
PRETAX OPERATING INCOME 41 36 87 67 155
OTHER INCOME (DEDUCTIONS), NET - 1 - 4 6
INTEREST CHARGES
Interest on long-term debt 18 6 39 5 18
Other interest - 14 - 13 40
----- ----- ----- ----- -----
Total Fixed Charges 18 20 39 18 58
----- ----- ----- ----- -----
NET INCOME BEFORE INCOME TAXES 23 17 48 53 103
INCOME TAXES 9 6 19 20 39
----- ----- ----- ----- -----
CONSOLIDATED NET INCOME $ 14 $ 11 $ 29 $ 33 $ 64
===== ===== ===== ===== =====
The accompanying condensed notes are an integral part of these statements.
PE-7
91
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PE-8
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
March 29- January 1- Nine Months Ended
September 30, 1999 March 28, 1999 September 30 ,1998
------------------ -------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29 $ 33 $ 64
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 31 14 46
Deferred income taxes 14 - (7)
Changes in current assets and liabilities 35 (29) 2
Other, net (8) 3 14
------- ------- -------
Net cash provided by operating activities 101 21 119
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Panhandle (1,900) - -
Capital and investment expenditures (27) (4) (66)
Net decrease (increase) in advances receivable - parent - (17) (53)
Retirements and other - - -
------- ------- -------
Net cash used in investing activities (1,927) (21) (119)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from parent 1,116 - -
Proceeds from senior notes 785 - -
Net decrease (increase) in note receivable - parent (46) - -
Dividends paid (29) - -
------- ------- -------
Net cash provided by financing activities 1,826 - -
------- ------- -------
Net Increase (Decrease) in Cash and Temporary Cash
Investments - - -
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD - - -
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ - $ - $ -
======= ======= =======
OTHER CASH FLOW ACTIVITIES WERE:
Interest paid (net of amounts capitalized) $ 30 $ 12 $ 64
Income taxes paid (net of refunds) 5 37 56
The accompanying condensed notes are an integral part of these statements.
PE-9
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Cost $1,500 $2,760
Less accumulated depreciation and amortization 31 1,798
------ ------
Sub-total 1,469 962
Construction work-in-progress 28 17
------ ------
Net property, plant and equipment 1,497 979
------ ------
INVESTMENTS
Advances receivable - related parties - 738
Investment in affiliates 2 44
Other - 6
------ ------
Total investments and other assets 2 788
------ ------
CURRENT ASSETS
Receivables 89 94
Inventory and supplies 45 55
Deferred income taxes 11 2
Current portion of regulatory assets - 6
Note receivable - related parties 46 -
Other 28 23
------ ------
Total current assets 219 180
------ ------
NON-CURRENT ASSETS
Goodwill, net 702 -
Deferred income taxes - -
Debt expense 12 11
Other 3 15
------ ------
Total non-current assets 717 26
------ ------
TOTAL ASSETS $2,435 $1,973
====== ======
The accompanying condensed notes are an integral part of these statements.
PE-10
94
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
STOCKHOLDER'S INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock, no par, 1,000 shares authorized, issued and outstanding $ 1 $ 1
Paid-in capital 1,127 466
Retained earnings - 91
------ ------
Total common stockholder's equity 1,128 558
Long-term debt 1,094 299
------ ------
Total capitalization 2,222 857
------ ------
CURRENT LIABILITIES
Note payable - PanEnergy - 675
Accounts payable 5 56
Accrued taxes 11 58
Accrued interest 10 8
Other 121 117
------ ------
Total current liabilities 147 914
------ ------
NON-CURRENT LIABILITIES
Deferred income taxes - 99
Other 66 103
------ ------
Total non-current liabilities 66 202
------ ------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
TOTAL STOCKHOLDER'S INVESTMENT AND LIABILITIES $2,435 $1,973
====== ======
The accompanying condensed notes are an integral part of these statements.
PE-11
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(IN MILLIONS)
March 29- January 1- Nine Months Ended
September 30, 1999 March 28, 1999 September 30, 1998
------------------ -------------- ------------------
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1
------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 466 466 466
Acquisition adjustment to eliminate original
paid-in capital (466) - -
Capital contribution of acquisition costs by parent 11 - -
Cash capital contribution by parent 1,116 - -
------- ------- -------
At end of period 1,127 466 466
------- ------- -------
RETAINED EARNINGS
At beginning of period 101 92 34
Acquisition adjustment to eliminate original
retained earnings (101) - -
Net Income 29 33 64
Assumption of net liability by PanEnergy - 57 -
Common stock dividends (29) (81) (2)
------- ------- -------
At end of period - 101 96
------- ------- -------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,128 $ 568 $ 563
======= ======= =======
The accompanying condensed notes are an integral part of these statements.
PE-12
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PANHANDLE EASTERN PIPE LINE COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These Condensed Notes and their related Consolidated Financial Statements should
be read along with the Consolidated Financial Statements and Notes contained in
the 1998 Form 10-K of Panhandle Eastern Pipe Line Company, which include the
Reports of Independent Public Accountants. Certain prior year amounts have been
reclassified to conform with the presentation in the current year. In the
opinion of management, the unaudited information herein reflects all adjustments
necessary to assure the fair presentation of financial position, results of
operations and cash flows for the periods presented.
1. CORPORATE STRUCTURE
Panhandle Eastern Pipe Line Company is a wholly owned subsidiary of CMS Gas
Transmission, which is an indirect wholly owned subsidiary of CMS Energy.
Panhandle Eastern Pipe Line Company was incorporated in Delaware in 1929.
Panhandle is primarily engaged in interstate transportation and storage of
natural gas, which are subject to the rules and regulations of the FERC.
On March 29, 1999, Panhandle Eastern Pipe Line Company and its principal
consolidated subsidiaries, Trunkline and Pan Gas Storage, as well as its
affiliates, Trunkline LNG and Panhandle Storage, were acquired from subsidiaries
of Duke Energy by CMS Panhandle Holding for $1.9 billion in cash and existing
Panhandle debt of $300 million. Immediately following the acquisition, CMS
Panhandle Holding contributed the stock of Trunkline LNG and Panhandle Storage
to Panhandle Eastern Pipe Line Company. As a result, Trunkline LNG and Panhandle
Storage became wholly owned subsidiaries of Panhandle Eastern Pipe Line Company.
In conjunction with the acquisition, Panhandle's interests in Northern Border
Pipeline Company, Panhandle Field Services Company, Panhandle Gathering Company,
and certain other assets, including the Houston corporate headquarters building,
were transferred to other subsidiaries of Duke Energy; certain intercompany
accounts and notes between Panhandle and Duke Energy subsidiaries were
eliminated; and with respect to certain other liabilities, including tax,
environmental and legal matters, CMS Energy was indemnified for any resulting
losses. In addition, Duke Energy agreed to continue its environmental clean-up
program at certain properties and to defend and indemnify Panhandle against
certain future environmental litigation and claims with respect to certain
agreed-upon sites or matters.
CMS Panhandle Holding privately placed $800 million of senior unsecured notes
and received a $1.1 billion initial capital contribution from CMS Energy to fund
the acquisition of Panhandle. On June 15, 1999, CMS Panhandle Holding was merged
into Panhandle, at which point the CMS Panhandle Holding notes became direct
obligations of Panhandle. In August 1999, Panhandle initiated an exchange offer
which replaced the $800 million of notes originally issued by CMS Panhandle
Holding with substantially identical SEC-registered notes. Panhandle completed
the exchange offer in September 1999.
PE-13
97
The acquisition by CMS Panhandle Holding was accounted for using the purchase
method of accounting in accordance with generally accepted accounting
principles, with Panhandle preliminarily allocating the purchase price paid by
CMS Panhandle Holding to Panhandle's net assets as of the acquisition date.
Accordingly, the post-acquisition financial statements reflect a new basis of
accounting, and pre-acquisition period and post-acquisition period financial
results (separated by a heavy black line) are presented but are not comparable.
The final determination of the fair market value of Panhandle's net assets
acquired and the associated estimated remaining useful lives of the property,
plant and equipment are pending the results of ongoing studies. Upon completion
of these studies, certain components of the financial statements may be adjusted
to reflect the final purchase price allocations and estimated remaining useful
lives.
The excess purchase price over the prior carrying amount of Panhandle's net
assets as of March 29, 1999 totaled $1.3 billion, and was preliminarily
allocated as follows:
In Millions
- ------------------------------------------------------------
Property, Plant and Equipment $ 650
Accounts Receivable 3
Inventory (8)
Goodwill 711
Regulatory Assets, Net (15)
Liabilities (39)
Debt Valuation (6)
Other 10
- ------------------------------------------------------------
Total $ 1,306
============================================================
Goodwill of approximately $711 million was recognized by Panhandle and will be
amortized on a straight-line basis over 40 years. This amount represents the
excess of the purchase price over Panhandle's net assets after fair value
adjustments, and may be adjusted after the completion of the ongoing studies
over the twelve months following the acquisition. The estimated average
remaining useful life of transmission and underground storage facilities, the
major components of Property, Plant and Equipment, has been revised to 40 years
based on preliminary internal studies.
Pro forma results of operations for 1999 and 1998 as though Panhandle had been
acquired and purchase accounting applied at the beginning of 1999 and 1998,
respectively, are as follows:
In Millions
- -----------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended Year Ended
September 30, 1999 September 30, 1998 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------
Revenues $ 340 $ 339 $ 470
Net Income 56 44 60
Total Assets 2,435 2,437 2,477
- -----------------------------------------------------------------------------------------------------------------
PE-14
98
2. REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. Hearings were completed in October 1997 and initial decisions
by a FERC ALJ were issued on certain matters in May 1998 and on the remainder of
the rate proceedings in November 1998. Responses to the initial decisions were
provided by Trunkline to FERC following the issuance of the initial decisions.
In May 1999, FERC issued an order remanding certain matters back to the ALJ for
further proceedings. On September 16, 1999, Trunkline filed with FERC a
settlement agreement which would resolve certain issues in this proceeding and
would require Trunkline to refund approximately $2 million. The ALJ has
certified the settlement; it is currently pending review by FERC.
In conjunction with a FERC order issued in September 1997, certain natural gas
producers were required to refund previously collected Kansas ad-valorem taxes
to interstate natural gas pipelines. These pipelines were ordered to refund
these amounts to their customers. All payments are to be made in compliance with
prescribed FERC requirements. At September 30, 1999 and December 31, 1998,
accounts receivable included $53 million and $50 million, respectively, due from
natural gas producers, and other current liabilities included $53 million and
$50 million, respectively, for related obligations.
In June 1998, Trunkline filed a petition with the FERC to abandon 720 miles of
its 26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. Trunkline requested permission to transfer the pipeline to an
affiliate, which had entered into an option agreement with Aux Sable for
potential conversion of the line to allow transportation of hydrocarbon vapors.
Trunkline requested FERC to grant the abandonment authorization in time to
separate the pipeline from existing facilities and allow Aux Sable to convert
the pipeline to hydrocarbon vapor service by October 1, 2000, if the option was
exercised. The option expired on July 1, 1999 and was not renewed by Aux Sable.
On November 8, 1999, the FERC issued a letter order dismissing Trunkline's
filing without prejudice to refiling the abandonment to reflect changed
circumstances. Trunkline continues to evaluate alternatives regarding the
26-inch pipeline.
On May 19, 1999, Trunkline and Trunkline LNG submitted a compliance filing
advising the FERC that the acquisition by CMS Energy of Trunkline LNG triggered
certain provisions of a 1992 settlement. The settlement resolved issues related
to minimum bill provisions of the Trunkline LNG Rate Schedule PLNG-1, as well as
pending rate matters for Trunkline and refund matters for Trunkline LNG.
Specifically, the settlement provisions require Trunkline LNG, and Trunkline in
turn, to make refunds to customers, including Panhandle Eastern Pipe Line
Company and Consumers, who were parties to the settlement, if the ownership of
all or portion of the LNG terminal is transferred to an unaffiliated entity.
Therefore, the total refund due customers of approximately $17 million will be
paid within 30 days of final FERC approval of the compliance filing. In
conjunction with the acquisition of Panhandle by CMS Energy, Duke Energy
indemnified Panhandle for this refund obligation. In conjunction with the
settlement, Panhandle Eastern Pipe Line Company and its customers entered into
an agreement, whereby upon FERC approval of the compliance filing described
above, Panhandle Eastern Pipe Line Company will file to flow through its portion
of the settlement amounts to its customers. The May 19, 1999 compliance filing
is pending FERC approval.
PE-15
99
3. RELATED PARTY TRANSACTIONS
A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows:
In Millions
- -----------------------------------------------------------------------
September 30, December 31,
1999 1998
- -----------------------------------------------------------------------
Receivables $ 9 $ 2
Accounts payable - 46
Taxes accrued - 35
- -----------------------------------------------------------------------
Interest charges included $14 million for the three months ended September 30,
1998; $13 million and $42 million for the nine months ended September 30, 1999
and 1998, respectively, for interest associated with notes payable to a
subsidiary of Duke Energy. Other income includes $1 million for the nine months
ended September 30, 1999 for interest on notes receivable from CMS Capital.
In conjunction with the acquisition of Panhandle by a subsidiary of CMS Energy,
all intercompany advance and note balances between Panhandle and subsidiaries of
Duke Energy were eliminated. Transactions with prior affiliates before the
acquisition are now reflected as receivables on the Consolidated Balance Sheets.
4. GAS IMBALANCES
The Consolidated Balance Sheets include in-kind balances as a result of
differences in gas volumes received and delivered. At September 30, 1999 and
December 31, 1998, other current assets included $21 million and $20 million,
respectively, and other current liabilities included $25 million and $22
million, respectively, related to gas imbalances.
5. INVESTMENT IN AFFILIATES
NORTHERN BORDER PARTNERS, L.P. Northern Border Partners, L.P. is a master
limited partnership that owns 70 percent of Northern Border Pipeline Company, a
partnership operating a pipeline transporting natural gas from Canada to the
Midwest area of the United States. At December 31, 1998, Panhandle held a 7.0
percent limited partnership interest in Northern Border Partners, L.P., and
thus, an indirect 4.9 percent ownership interest in Northern Border Pipeline
Company. In conjunction with the acquisition of Panhandle by CMS Energy,
Panhandle transferred its interest in Northern Border to a subsidiary of Duke
Energy in the first quarter of 1999.
LEE 8 STORAGE. Panhandle, through its subsidiary Panhandle Storage, owns a 40
percent interest in the Lee 8 partnership, which operates a 1.4 bcf natural gas
storage facility in Michigan. This interest results from the contribution of the
stock of Panhandle Storage to Panhandle Eastern Pipe Line Company by CMS
Panhandle Holding on March 29, 1999.
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6. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES: Panhandle estimates capital expenditures and investments,
including allowance for funds used during construction, for the next three years
to be approximately $60 million for each year. These estimates are prepared for
planning purposes and are subject to revision. Capital expenditures for 1999 are
expected to be satisfied by cash from operations.
LITIGATION: Under the terms of the sale of Panhandle to CMS Energy discussed in
Note 1 to the Consolidated Financial Statements, subsidiaries of Duke Energy
indemnified CMS Energy from losses resulting from certain legal and tax
liabilities of Panhandle, including the matter specifically discussed below:
In May 1997, Anadarko filed suits against Panhandle and other PanEnergy
affiliates, as defendants, both in the United States District Court for the
Southern District of Texas and State District Court of Harris County, Texas.
Pursuing only the federal court claim, Anadarko claims that it was effectively
indemnified by the defendants against any responsibility for refunds of Kansas
ad valorem taxes which are due from purchasers of gas from Anadarko, retroactive
to 1983. In October 1998 and January 1999, the FERC issued orders on ad valorem
tax issues, finding that first sellers of gas were primarily liable for refunds.
The FERC also noted that claims for indemnity or reimbursement among the parties
would be better addressed by the United States District Court for the Southern
District of Texas. Panhandle believes the resolution of this matter will not
have a material adverse effect on consolidated results of operations or
financial position.
Panhandle is also involved in other legal, tax and regulatory proceedings before
various courts, regulatory commissions and governmental agencies regarding
matters arising in the ordinary course of business, some of which involve
substantial amounts. Where appropriate, Panhandle has made accruals in
accordance with SFAS 5, Accounting for Contingencies, in order to provide for
such matters. Management believes the final disposition of these proceedings
will not have a material adverse effect on consolidated results of operations or
financial position.
OTHER COMMITMENTS AND CONTINGENCIES: In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. Panhandle's pipelines, with respect to certain producer
contract settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. The potential
liability of the producers to the government and of the pipelines to the
producers involves complex issues of law and fact which are likely to take
substantial time to resolve. If required to reimburse or indemnify the
producers, Panhandle's pipelines will file with FERC to recover a portion of
these costs from pipeline customers. Management believes these commitments and
contingencies will not have a material adverse effect on consolidated results of
operations or financial position.
Under the terms of a settlement related to a transportation agreement between
Panhandle and Northern Border Pipeline Company, Panhandle guarantees payment to
Northern Border Pipeline Company under a transportation agreement held by a
third party. The transportation agreement requires estimated total payments of
$38 million for the remainder of 1999 through 2001. Management believes the
probability that Panhandle will be required to perform under this guarantee is
remote.
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7. ENVIRONMENTAL MATTERS
Panhandle is subject to federal, state and local regulations regarding air and
water quality, hazardous and solid waste disposal and other environmental
matters.
Panhandle has identified environmental contamination at certain sites on its
systems and has undertaken clean-up programs at these sites. The contamination
resulted from the past use of lubricants in compressed air systems containing
PCBs and the prior use of wastewater collection facilities and other on-site
disposal areas. Soil and sediment testing to date has detected no significant
off-site contamination. Panhandle has communicated with the EPA and appropriate
state regulatory agencies on these matters. Under the terms of the sale of
Panhandle to CMS Energy, as discussed in Note 1 to the Consolidated Financial
Statements, a subsidiary of Duke Energy is obligated to complete the Panhandle
clean-up programs at certain agreed-upon sites and to defend and indemnify
Panhandle against certain future environmental litigation and claims. These
clean-up programs are expected to continue until 2001.
8. BENEFIT PLANS
RETIREMENT PLAN: Following the acquisition of Panhandle by CMS Energy described
in Note 1, Panhandle now participates in CMS Energy's non-contributory defined
benefit retirement plan covering most employees with a minimum of one year
vesting service.
Under the terms of the acquisition of Panhandle by CMS Energy, benefit
obligations related to active employees and certain plan assets were transferred
to CMS Energy. Benefit obligations related to existing retired employees and
remaining plan assets were retained by a subsidiary of Duke Energy.
OTHER POSTRETIREMENT BENEFITS: Panhandle, in conjunction with CMS Energy,
provides certain health care and life insurance benefits for retired employees
on a contributory and noncontributory basis. Substantially all employees may
become eligible for these benefits if they have met certain age and service
requirements as defined in the plans.
Under the terms of the acquisition of Panhandle by CMS Energy as discussed in
Note 1 to the Consolidated Financial Statements, benefit obligations related to
active employees were transferred to CMS Energy and are reflected in the
financial statements of Panhandle, and benefit obligations related to existing
retired employees and plan assets were retained by a subsidiary of Duke Energy.
9. TAXES
As described in Note 1, the stock of Panhandle was acquired from subsidiaries of
Duke Energy by CMS Panhandle Holding for a total of $2.2 billion in cash and
acquired debt. The acquisition was treated as an asset acquisition for tax
purposes, which eliminated Panhandle's deferred tax liability and gave rise to a
new tax basis in Panhandle's assets equal to the purchase price. This tax basis
in excess of Panhandle's current book basis created deferred tax assets and
associated paid-in-capital of approximately $477 million. When CMS Panhandle
Holding was merged with Panhandle, approximately $462 million of Panhandle's
deferred tax assets were eliminated.
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10. SFAS 71
As a result of Panhandle's new cost basis resulting from the merger with CMS
Panhandle Holding, which includes costs not likely to be considered for
regulatory recovery, in addition to the level of discounting being experienced
by Panhandle, it no longer meets the criteria of SFAS 71 and has discontinued
application of SFAS 71. Accordingly, upon acquisition by CMS Panhandle Holding,
the remaining net regulatory assets of approximately $15 million were eliminated
in purchase accounting (See Note 1).
11. LONG TERM DEBT
On March 29, 1999, CMS Panhandle Holding Company privately placed $800 million
of senior notes (See Note 1) including: $300 million of 6.125 percent senior
notes due 2004; $200 million of 6.5 percent senior notes due 2009; and $300
million of 7.0 percent senior notes due 2029. On June 15, 1999, CMS Panhandle
Holding was merged into Panhandle and the obligations of CMS Panhandle Holding
under the notes and the indenture were assumed by Panhandle. In August 1999,
Panhandle initiated an exchange offer which replaced the $800 million of notes
originally issued by CMS Panhandle Holding with substantially identical
SEC-registered notes. Panhandle completed the exchange offer in September 1999.
In conjunction with the purchase accounting, Panhandle's existing notes totaling
$300 million were revalued resulting in a net premium recorded of approximately
$5 million.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Panhandle Eastern Pipe Line Company:
We have reviewed the accompanying consolidated balance sheet of Panhandle
Eastern Pipe Line Company (a Delaware corporation) and subsidiaries as of
September 30, 1999, and the related consolidated statements of income, common
stockholder's equity and cash flows for the three-month and nine-month periods
then ended. These financial statements are the responsibility of the Company's
management. The consolidated financial statements of Panhandle Eastern Pipe Line
Company as of December 31, 1998, were audited by other auditors whose report
dated February 12, 1999, expressed an unqualified opinion on those statements.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
Houston, Texas
November 5, 1999
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QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CMS ENERGY
Quantitative and Qualitative Disclosures About Market Risk is contained in PART
I: CMS ENERGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS which is
incorporated by reference herein.
CONSUMERS
Quantitative and Qualitative Disclosures About Market Risk is contained in PART
I: CONSUMERS ENERGY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS which is
incorporated by reference herein.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion below is limited to an update of developments that have occurred
in various judicial and administrative proceedings, many of which are more fully
described in CMS Energy's, Consumers' and Panhandle Eastern Pipe Line Company's
Form 10-K for the year ended December 31, 1998, and in their Form 10-Q for the
quarters ended March 31, 1999 and June 30, 1999. Reference is made to the Notes
to the Consolidated Financial Statements included herein for additional
information regarding various pending administrative and judicial proceedings
involving rate, operating, regulatory and environmental matters.
CONSUMERS
ANTITRUST LITIGATION
For a discussion of Consumers' antitrust litigation see Note 2 subsection
"Antitrust" of the Condensed Notes to the Consolidated Financial Statements in
Part I of this Report, incorporated by reference herein.
PANHANDLE
REGULATORY MATTERS
For a discussion of certain Panhandle regulatory matters see Note 2 "Regulatory
Matters" of the Condensed Notes to the Consolidated Financial Statements in Part
I of this Report, incorporated by reference herein.
OTHER MATTERS
For a discussion of Panhandle's other litigation matters see Note 6 subsection
"Litigation" of the Condensed Notes to the Consolidated Financial Statements in
Part I of this Report, incorporated by reference herein.
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105
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED EQUITY SECURITIES
On November 10, 1999, CMS Energy issued in a private placement pursuant
to Section 4(2) of the Securities Act 125,000 shares of its Mandatorily
Convertible Preferred Stock to CMS Share Trust, a Delaware statutory business
trust, in exchange for all of the beneficial interest in such trust.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) LIST OF EXHIBITS
(3)(a) - Restated Articles of Incorporation of CMS Energy.
(4)(a) - Third Supplemental Indenture dated as of November 4, 1999, between
Consumers and The Bank of New York, as Trustee.
(12) - CMS Energy: Statements regarding computation of Ratio of Earnings to
Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(15)(b) - Consumers: Letter of Independent Public Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(27)(c) - Panhandle: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
(B) REPORTS ON FORM 8-K
CMS Energy filed Current Reports on Form 8-K on July 1, 1999 covering matters
pursuant to "Item 5. Other Events" and "Item 7. Exhibits", on July 13, 1999
covering matters pursuant to "Item 7. Exhibits", and on September 9, 1999,
September 24, 1999, October 18, 1999 and October 26, 1999 each covering matters
pursuant to "Item 5. Other Events".
Consumers filed a Current Report on Form 8-K on July 1, 1999 covering matters
pursuant to "Item 5. Other Events" and "Item 7. Exhibits", and on September 9,
1999, September 24, 1999, October 18, 1999 and October 26, 1999 each covering
matters pursuant to "Item 5. Other Events".
Panhandle Eastern Pipe Line Company filed a Current Report on Form 8-K on July
19, 1999 covering matters pursuant to "Item 1. Acquisition of Assets," "Item 4.
Changes in Registrant's Certifying Accountant," and "Item 7.
Exhibits."
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
-------------------------------------------
(Registrant)
Dated: November 12, 1999 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
CONSUMERS ENERGY COMPANY
-------------------------------------------
(Registrant)
Dated: November 12, 1999 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
PANHANDLE EASTERN PIPE LINE COMPANY
-------------------------------------------
(Registrant)
Dated: November 12, 1999 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
107
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(3)(a) Restated Articles of Incorporation of CMS Energy.
(4)(a) Third Supplemental Indenture dated as of November 4, 1999,
between Consumers and The Bank of New York, as Trustee.
(12) CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15)(a) CMS Energy: Letter of Independent Public Accountant
(15)(b) Consumers: Letter of Independent Public Accountant
(27)(a) CMS Energy: Financial Data Schedule
(27)(b) Consumers: Financial Data Schedule
(27)(c) Panhandle: Financial Data Schedule
(99) CMS Energy: Consumers Gas Group Financials